STUDY ON WALMART IN INDIA & IT’S COMPETITORS

“STUDY ON WALMART IN INDIA & IT’S COMPETITORS”

Submitted To:

Submitted By:

TABLE OF CONTENTS

S. NO. 1)

PARTICULARS

P NO.

INTRODUCTION

7-21

 

2)

Incorporation & Growth Recent Initiatives

CURRENT SCENARIO OF RETAIL SECTOR IN INDIA

22-85

 Growth of Organized Retail  India : Top emerging Market for Retailers

3)

REASON WHY WALMART SELECTED INDIA’S BHARTI FOR RETAIL CHAIN  

86-98

Bharti-Walmart joint venture in India Cash and Carry Format

4)

COMPETITORS

5)

MARKETING AND PRICING STRATEGIES OF WALMART & ITS COMPARATIVE STUDY WALMART STRATEGIES FOR GROWTH (FUTURE PLANS)

172-196

OPERATIONAL DIVISIONS

215-225

6) 7)

 

      

Comparative Study Comparison with Tesco & Carrefour

Walmart Stores U.S Walmart discount stores Walmart Supercenters Walmart Neighbourhood Market Private Label Brands Market Side Sam’s Club

99-171

197-214

2

8)

WALMART & ITS IMPACT ON UNORGANIZED RETAIL SECTOR

226-264

9)

265-319

10)

WALMART & ITS STRATEGIES TO UNDERSTAND INDIAN CONSUMERS SWOT ANALYSIS OF WALMART

11)

LEARNINGS AND FINDINGS

315-326

310-314

 Experience  Conclusion  Bibliography

12)

BIBLIOGRAPHY

327

3

Wal-mart Wal-mart was founded by Sam Walton and his brother, James “Bud” Walton, in 1962. The Walton boys revolutionized discount retailing, with the result that by 1989 Walmart was the world’s largest retailer. The Walton’s proposition was simple, deliver a wide array of merchandise at discount prices topped up by a friendly service. By 1998, it was servicing more than 100 million customers weekly and had a sales volume of US$138 billion with an overall operating margin of 5.8 percent The Walton brothers opened their first Wal-mart Discount City store in Rogers, Arkansas, after Ben Franklin management—the Walton’s operated a number of franchised stores from the chain—rejected a suggestion to open discount stores in small towns. The Discount City store concept consisted of servicing small and middle sized towns at prices equal to or lower than prices in nearby cities. In 1972 Sam Walton took the 30 existing stores public using the proceeds of the offering to build a warehouse that allowed him to buy large volumes of merchandise at lower prices. Due to the strategy of covering small towns, virtually ignored by other competitors, the expansion progressed rapidly without any substantive direct competition until the mid 1980s. However, by 1993, Wal-mart was in 47 states and its expansion led to competition with Kmart, Target, Sears and J.C. Penney, for which the established players were ill prepared.

In the 1990s the company moved beyond its rural expansion strategy and began diversifying into grocery operations (Wal-Mart Supercenters), membership warehouse clubs (SAM’S Clubs) and deep discount warehouse outlets (Bud’s Discount City). By this time the company also felt it was now prepared for forays outside the United States.

Sam Walton led the company until 1988, being a powerful CEO whose philosophy drove every aspect of the business. He believed in empowering yet

4

controlling employees, maintaining Wal-mart’s costs and prices below everybody else’s, and aimed at logistics excellence by maintaining technological superiority.

Empowering Employees By 1998 Wal-mart was the largest private employer in the US, employing 910,000 associates (employees in Wal-mart terminology). Associates were given responsibility, recognition and a share of the profits and were expected to be totally committed to the company and its success. “As Wal-mart associates we know it is not good enough to simply be grateful to our customers for shopping in our stores—we want to demonstrate our gratitude in every way we can! We believe that doing so is what keeps our customers coming back to Wal-mart again and again.” Wal-mart associates strove to provide exceptional customer service and everything possible was done to make shopping at Wal-mart a friendly experience.

Associates were well rewarded for their commitment and dedication. Sam Walton believed that taking care of his associates—in terms of moral and motivational boosts in addition to financial rewards—was the first and most fundamental step to taking care of his customers. Wal-mart was the living embodiment of Sam Walton—it operated in a fun, unpredictable and interesting sort of way.

Financially, managers, supervisors and store personnel with over one year of employment had incentive compensations or bonuses based on store profits and were offered stock ownership.

To give associates at all levels a perspective of the total business, training was extensive and located away from the home office. New associates shared in the experience and culture of Wal-mart by being trained by assistant managers from other stores, and store managers received training in the distribution centers to get an understanding of the internal workings of the distribution network. Suggestion programs were taken seriously and were not only a good way to involve associates in the business but were also estimated to be responsible for an annual savings of

5

up to 2 percent of net sales. The typical management team member was a middleaged executive who worked in Wal-mart since high school or college.

In 1988, David Glass was named CEO and President. Glass started as executive VP of finance in 1976 and was known to be as frugal as Sam Walton himself.

Like all the regional VPs, buyers and corporate officers, he spent two to three days a week visiting stores. Wal-mart did not operate regional offices; instead it owned a fleet of aircraft and centralized regional VP weekly meetings in the main headquarters. Every Friday morning, at the weekly merchandise meeting, store and individual product sales were discussed and, on Saturday morning, management, associates, friends and relatives participated in an informal information-sharing motivation session. By Monday decisions taken over the weekend were implemented throughout the stores.

“Everyday-Low-Prices” Sam Walton’s obsession with keeping prices below competitors led him to check his and the competition’s stores thoroughly, counting the number of cars in the car park and going so far as to taking a tape measure and evaluating shelf space. He looked out for good ideas and was not afraid to copy them. This attitude assured that “Everyday low- prices” was a genuine strategy and not just a slogan. Walmart offered brand name products at prices consistently lower—approximately 2– 4 percent—than those found at department or specialty stores.

The everyday-low-price strategy implied that there were few promotions.

Although other major competitors, including Carrefour, typically ran 50 to 100 advertised circulars per year—spending 2.1 percent of discount store sales on advertising—WalMart produced only 12–13 major circulars per year—spending 1.5 percent of sales. Because retail competition was mainly local, the everydaylow-price guarantee required that each store manager set his/her own prices. They also were responsible for product offerings and shelf space allocation decisions, all of which were based on market specific inventory and sales data supplied by

6

advanced information systems. A study done in the mid 1980s showed that Walmart’s prices were 1 percent lower than Kmart’s when the two stores were located next to each other and were 6 percent higher when Wal-mart operated with no Kmart nearby.

Technological Superiority Technological superiority was seen as a competitive advantage by Wal-mart.

Technology was used not only in setting price and product offerings, but also in areas such as communication, distribution and the control of supplier relations.

Wal-mart’s information systems expense was estimated to be 1.5 percent of sales compared with 1.3 percent for its direct US competitors.

Wal-mart operated a satellite system that enabled communication and electronic scanning throughout the store, supplier and distributor networks. The satellite system allowed requests for merchandise at the point of sale to be transmitted to the headquarters or to a supplier’s distribution centers instantly. For the most part, distribution was centralized in Wal-mart’s distribution centers and a system known as cross-docking4 was used to reduce handling and inventory costs. A study in 1993 estimated Wal-mart’s inbound logistic costs at 3.7 percent of store sales compared with 4.8 percent for its direct US competitors. Wal-mart’s truck fleet delivered to stores 24 hours a day and picked up merchandise from suppliers on return trips running at a sixty percent capacity on backhaul.

To even better manage the supply chain, Wal-mart’s relation with its 3,600 suppliers was enhanced by an Electronic Data Interchange (EDI) system. By the late 1980s key suppliers were already directly managing Wal-mart’s merchandise inventory. All Walmart’s suppliers received a planning packet with information about the specific department with which the vendor was dealing as well as Walmart’s expectations from the relationship. Vendor negotiations were centralized and were done in undecorated standard interviewing rooms. Wal-mart restricted its suppliers to companies who limited the workweek to sixty hours, provided safe

7

working conditions and did not employ child labour. No single supplier was expected to account for more than three percent of the company’s purchases.

Wal-mart was organized into three operating divisions: Wal-mart store division, SAM’s Club (membership warehouse club), and the international division. The Walmart store division included discount stores (the initial Wal-mart format selling general merchandise) and supercenters (a combination discount store and supermarket).

Discount Stores The discount store phenomenon emerged in the 1950s as the low price alternative to supermarkets. In order to survive on gross margins that were 10–15 percent below standard retailers’, discount stores cut all possible costs. Frills were nonexistent, ancillary services were unknown and in-store selling was limited. Walmart’s discount stores were no exception in this area. To assure customer satisfaction Wal-mart relied on the human touch in caring for the customer, like having “people greeters” welcome customers into the shop.

Wal-Mart stores offered shopping in several departments including family apparel, health and beauty aids, household needs, electronics, toys, fabrics and crafts, lawn and garden, jewellery and shoes. Although Wal-mart bet on offering brand name products it also sold private labels in apparel (25 percent of the product offerings were private labelled), health and beauty care, dog food, among others. The company also offered a premium quality private label line under the “Sam’s Choice” brand with a 26 percent price advantage over comparable branded products. Inventory in stores was kept at a minimum representing ten percent of store space; the traditional US retailers used 25 percent of their space for inventory. A typical facility covered 100,000 sq. ft. of floor space and, from the 1980s, stores were constructed only in areas where they could be expanded (after 1992 nearly 90 percent of the expanded discount stores were transformed into super-centres).

8

Super-centres In 1987, the first Wal-mart Supercenter was opened. Interestingly, Wal-mart, watching the entry of French companies into the US, also tested its own variant of the hypermarket concept. Later, as the French threat waned and they exited the market, this was abandoned in favour of smaller supercenters. A Wal-mart Supercenter provided one-stop family shopping convenience. The store combined a full line of groceries and a general merchandise department store under one roof.

Supercenters were designed to save customers time and money by joining grocery shopping with specialty services like bakeries, delis, photo labs and hair salons— everything a shopper could dream of in 120,000 to 130,000 sq. ft. These specialty and convenience shops had two great advantages: they attracted customers and offered margins of 35 to 45 percent—quite a benefit when basic food retailing was known to give very low margins (the industry average in 1992 was two percent).

Kmart bought into the concept in the early 1990s and Target in 1995.

SAM’s Clubs In 1983, Wal-mart opened three Sam’s Warehouse Clubs. Warehouse clubs supplied members with brand name merchandise at warehouse prices for personal use or resale. Being dependent on high volume to compensate for the narrow profit margins, they limited the number of SKUs sold and offered institutional or multi pack sizes. SAM’s Clubs were not felt to be competing with Wal-mart’s discount stores directly and were run by a completely different management group.

In the early 1990s, as SAM’s Club’s competitors chose to grow by filling in the gaps in their existing markets rather then by entering new ones, its management chose a bold defensive move. Rather than giving competitors any openings into the concept space, SAM’s Club’s management purposely chose to cannibalize their own sales by opening additional SAM’s Clubs in many markets. This situation created over capacity in the market triggering consolidation and a

9

decrease of comparable stores sales for the first time. But the strategy appeared to have the desired effect. In 1993 SAM’s Clubs acquired The Wholesale Club and Kmart’s Pace Clubs, managing to keep its dominant position in the warehouse segment of the industry.

International Expansion Although the early 1990s saw Wal-mart operating more than 2,000 stores worth more than US$73 billion, the stagnant American economy was making it difficult to sustain the company’s historic double-digit comparable store sales growth.

With limited domestic options, Wal-mart, for the first time, began to consider expansion outside the US seriously. Wal-mart’s first external foray was into Mexico where, in 1991, it formed a partnership with CIFRA, Mexico’s most successful retailer (CIFRA’s 1997 sales were US$5,267million). The success of Wal-mart’s Mexican expansion was seen by several analysts as the result of an improved economic landscape; the promise associated with the North American Free Trade Agreement (NAFTA); and familiarity and demand for US products, as many of the middle class population had relatives living in the US or were under the influence of the “American-way-of-life”. Wal-mart’s external efforts in Mexico and the move into Puerto Rico and Argentina in 1992 did little to bolster the company’s fortunes. Sales growth was down again in 1993 and the firm’s stock plummeted 22 percent, destroying nearly US$17 billion of value. For the first time, the giant’s performance was being doubted. However, the company continued moving offshore. In 1994 it purchased 122 Woolco stores in Canada and quickly converted their operations to the Wal-mart format. However, to assuage local fears, the company moved carefully, giving Canadian vendors equal opportunity to supply their stores.

In 1995, Wal-mart acquired Lojas Americanas in Brazil. Although success in Canada was expected and predictable, South America was the biggest challenge to date for Wal-mart. It was the first region where cultural habits were different from those of the US and where it faced highly competitive and well established competitors, such as Carrefour. In Argentina, for instance, sales stumbled at first,

10

as Wal-mart was selling cuts of meat and cosmetics preferred in the US. In Brazil it was selling golf clubs in a country were golf is an elite game and few consumers have money to care for and purchase the equipment. However, four years after entering Argentina, Wal-mart seemed to have learned its lesson as Donald C. Bland, president and CEO of Wal-mart Argentina suggested, “following our blueprint too closely wasn’t a good idea.” Walmart caught up with local competitors, not only by catering to the demand for locally preferred items, but also by changing its store layout to integrate French touches, such as wide aisles.

Wal-mart also discovered that Carrefour was a nimble competitor. “They’re just relentless, the toughest competitor I’ve ever seen anywhere,” said a retail executive who watched Carrefour ward off Wal-mart in Brazil and Argentina in the mid-1990s. To counter Wal-mart, Carrefour slashed prices, remodeled, and even relocated stores.

When a planned Wal-mart store opening in one Argentine city was delayed by construction problems for four months, Carrefour seized the opportunity to renovate its closest store. Wal-mart was aware that a Carrefour shopper who stopped to buy groceries or a pair of tennis shoes could also get a watch repaired, order mobile telephone service, rent a car, or book plane tickets and hotel rooms for a vacation. Wal-mart offered few such services. Carrefour had been an innovator in store design, softening the look of its warehouse-size buildings by installing wood floors and nonfluorescent lights in some departments and putting service counters in the food department, where shoppers can get meat, cheese, and bread sliced to order.

In 1996, Wal-mart made its first attempt at selling in Asia by entering China with a subsequent entry into Korea in 1998. It entered the European market by acquiring the German retailer Werkauft in 1997 and followed this up two years later as it went on to acquire another German chain, InterSpar, and ASDA, a British retailer. By the end of 1998, with three continents covered and 3,599 stores (715 of them outside the US) generating sales of US$138,000 million, Wal-mart was closer than ever to achieving Sam Walton’s dream of “lower[ing] the cost of living for everyone, not just in America. … [W]e’ll give the world an opportunity 11

to see what it’s like to save and have a better lifestyle, a better life for all.”

Nevertheless, when compared with Carrefour, Wal-mart took a cautious approach to foreign expansion, with foreign sales in 1998 accounting for only nine percent of Walmart revenues, against the 44 percent for Carrefour.

Promodes Promodes was founded by Paul-Auguste Halley and Leonor Duval Lemonnier in Normandy, France, in 1961. From the very beginning the company diversified into different concepts within France. The first supermarket opened in Mantes-laVille in 1962 and the first cash & carry outlet opened in 1964. Following in the footsteps of Carrefour’s hypermarket success, Promodes opened its first hypermarket in 1970 in Mondeville, the present location of its headquarters. As the competitiveness and construction restriction laws in France tightened, Promodes further diversified into convenience stores in 1972 and into hard discount in 1979.5 The 1970s also saw Promodes expanding into new geographic markets. The firm developed in European operations by entering Germany and Spain in 1976, Portugal in 1985, Italy in 1987, Greece in 1990, Turkey in 1996 and the Belgian market in 1998. The first transcontinental move happened when it purchased Southeastern US-based Red Food Stores chain in 1980. Through its “Dia” hard discount chain, Promodes entered Argentina in 1997. The first venture in Asia was in Taiwan in 1996, but in 1998, Promodes decided to sell its position in the Taiwanese joint venture to invest in a store in Indonesia instead.

Although the bulk of its international investments were successful, Promodes faced major setbacks in the US and Germany. In the US, Promodes’ attempt to sell both food and non-food products at its Red Food Stores was unsuccessful and the chain was sold to Dutch retailer Royal Ahold in 1994. After several years of accumulated losses, Promodes decided to sell its German hypermarket subsidiary in 1996. At the time of the merger with Carrefour, Promodes had 62 percent of its sales in France, 29 percent in Spain and the rest in other countries. Globally it

12

operated about 175 hypermarkets, 535 supermarkets, 2,185 hard discounters and 1,763 convenience stores. It also supplied institutions and restaurants through its 201 cash & carries.

Hypermarkets accounted for 42 percent of the sales, supermarkets accounted for ten percent, hard discounters for twelve percent, cash & carries for eight percent and convenience stores and others for 28 percent.

To manage this diversified portfolio of business, Promodes’ management structure was organized differently from Carrefour or Wal-mart (which are organized by geographic areas and store concepts respectively). Instead, Promodes’ management structure was organized by a symbiosis of both. Under CEO PaulLouis Halley’s (Paul-Auguste’s son that took over as CEO in 1971) there were four operational divisions: France, hypermarket Spain, discount international, and Hard discount international. Until the marriage, Promodes was considered Carrefour’s major retail rival but its performance was nowhere near as good. Its diversification into different concepts translated into lower operational margins— 3.5 percent against Carrefour’s 4.5 percent—and lower return on the assets in

The Deal Wal-mart Takes Europe by Storm With the purchase of 21 warehouse-sized stores from the German chain Wertkauf GmbH in 1997, Wal-mart’s entry into the European retail scene was anything but quiet. German consumers, the most price sensitive in Europe, quickly warmed to the Every-day-low-[rice slogan as well as the customer service often lacking at domestic retailers’ stores, much to the consternation of the staid and established German retail sector. In 1998, Wal-mart acquired a further 74 warehouses from Hamburg-based Spar Handels AG, a company that posted a pre-tax loss on ordinary activities in 1998 and predicted no real recovery in 1999 because of increased price competition. As Walmart’s presence in Germany increased, Metro AG—Germany and Europe’s largest retailer at the time—sped up the takeover of control of its franchised wholesaling businesses, liquidating businesses totalling one-third of its sales to fund it the reorganization.

13

Although Wal-mart’s initial moves were restricted to Germany, the continent’s largest economy, two acquisitions in slightly over a year caught the attention of other European retailers as they speculated about Wal-mart’s future moves. “If Wal-mart was to buy a large competitor, it would create a snowball effect and lead to a more rapid concentration than what is economically justified… [However,] we see the future with serenity despite the arrival of big monsters like Wal-mart” said Luc Vandevelde, Promodes’ CEO, at a breakfast meeting of Belgian company executives. In June 14, 1999, Wal-mart announced the acquisition of English retailer Asda Group for £6.7 billion. “It’s going to be a shock to the system,” said a retail analyst. “But it also suggests that Wal-mart is very serious about Europe. They will go for well established major players that they can turn to their way of operating while preserving the best of their successes.” European retailers had long feared the arrival of the world’s largest retailer, whose name was synonymous with low prices. With margins averaging double those of continental European food chains, they had a lot to lose.

With the purchase of Asda, Wal-mart’s biggest to date, the company doubled its international sales to more that US$25 billion. Even though Asda’s acquisition was a colossal investment and dwarfed earlier moves in Germany, analysts believed Wal-mart would further build its presence in Europe within the year. As an analyst at HypoVereinsbank AG in Munich put it, “Wal-mart is a latent danger, it will continue to seek take-over candidates in the next few months and could weaken the position of current market leaders.” A number of British retailers’ share prices fell in the days following the Asda acquisition announcement as analysts’ predicted that Wal-mart could offer retail prices as much as 5 percent below those being offered by its competitors. Kingfisher, whose plan to acquire Asda was ruined by the Wal-mart acquisition, saw its share price fall 2.5 percent.

Sainsbury’s shares fell 2.2 percent. Boots, the UK’s largest drug retailer, experienced a 1.6 percent decline in market value. Safeway, whose share price shrunk 32 percent in 1998, was seen as particularly vulnerable to predators and the countries two largest supermarket chains, Tesco and Sainsbury, were expected to seek a merger. Meanwhile, France’s Carrefour, the world’s eighth-biggest grocery

14

retailer and Netherlands’ Ahold, the number seven worldwide, were expected to accelerate their global expansion plans.

On June 20, 1999, the edition of the Financial Mail On Sunday noted that if Walmart were serious about entering Europe’s second largest market, it could no doubt do so by bidding for Carrefour, then valued at £16 billion, Promodes or Auchan. When contacted about such speculation Carrefour reiterated its previous declarations. According to Daniel Bernard, “Carrefour has the means to remain independent and to develop itself.” Promodes’ CEO Paul-Lois Halley, whose family controls the Promodes Group, said his company was not interested in selling to anyone. Auchan, also family-controlled, said it did not want to be acquired by Wal-mart, which had initiated take-over talks with the company approximately two years before. The Promodes’ move was seen as the first shot in a battle for consolidation of the European retail sector. “Carrefour would probably prefer to buy Promodes than have it snatched up by Wal-mart, giving the US group a big chunk of its market,” noted an analyst at Paris-based CCR Actions.

Furthermore, the marriage would give the joint company a chance to dominate France’s retail market where laws limiting the building new large stores had long given favour to small shopkeepers.

Promodes’ operations were expected to strengthen Carrefour’s position in many ways. Firstly, as Europe would account for over 85 percent of the joint group’s revenues it would lessen the volatility of Carrefour’s extensive and growing investments in emerging markets, providing more long-term stability in operating performance. Secondly, a wider presence in the low growth but stable European markets would provide a stronger cash-flow base on which Carrefour could continue its international expansion. Thirdly, food would account for over 75 percent of the new group’s revenues, up from 60 percent before, smoothing the cyclicality of Carrefour’s non-food business.

Analysts believed that the operating strengths of the proposed merger would be offset by significant risks, particularly on Carrefour’s financial structure. Coming just one year after the debt funded acquisition of Comptoirs Modernes, the taking on of Promodes with its weaker financial structure would stretch Carrefour’s 15

financial structure further, even if the transaction was going to be entirely financed with new equity. Additionally, much of Promodes’ international expansion was built up through a series of joint venture agreements that gave it options on control (e.g., in Italy, Argentina, Belgium and Greece), which, if Carrefour sought to exercise them, would mean a further large cash outlay with consequences for the group’s financial position.

Analysts believed in the strong market position of the new Carrefour. With stores on three continents it had the potential to manage its global supply chain and negate Wal-mart’s near legendary cost advantage. In one swoop, Carrefour not only became Europe’s largest retailer but surpassed Wal-mart in two critical South American markets that where the key to Wal-Mart’s global expansion, Brazil and Argentina.

As consequence of this string of moves and countermoves, retail stocks were on edge across the continent. Analysts and investors clearly expected the latest merger to precipitate a rash of other deals. As one analyst remarked “Wal-mart [given its US$242 billion market value] could still easily come in and buy the enlarged group if it wanted to.” However a hostile bid for either Carrefour or Promodes was looked on as difficult as both had family shareholders that controlled a significant amount of the stock.

The Regulatory Approval Process By mid October, most analysts viewed the Carrefour-Promodes merge as a done deal. The Halley family and their allies had already offered more than 50 percent of their shares and no news of any counter offer had emerged by 6 October, the final due date of counter offer submittance under the terms of the deal.

Nevertheless the need for European Union (EU) approval for the merger to be effective was an ongoing issue. Analysts were confident of the approval, as one analyst said, ‘[f]or me there is a one percent chance that Brussels stops the deal, while Paris, zero percent.

They would prefer to have a group called Carrefour that is second in the world rather than see Carrefour taken over by Wal-mart and Promodes by Ahold.”

16

Under EU merger and acquisition rules companies had to make a regulatory filling with all the necessary information within seven days of announcing their plan to merge. Although it is rare for companies to respect the seven-day deadline and the Commission seldom bothers to call them to order, the Carrefour-Promodes deal filing took an exceptionally long time. They announced their marriage at the end of August and the merger notification was filed with the EU’s competition watchdog on 5 October, but was declared incomplete twice on grounds of insufficient information.

The companies’ failure to meet EU information requirements was seen as a signal of disagreement with regulators about how the purchase should be reviewed. The European Commission stated that it would not start its formal investigation of the acquisition until it considered the application complete. A probe could then take between one and five months, depending on the seriousness of the antitrust concerns.

Further, following the merge announcement several unexpected problems arose within the Carrefour-Promodes universe. Both France and the Catalan regional governments expressed concerns that the merged company would have a virtual food market monopoly. In France, the combined company would control more than half the supermarket and hypermarket shopping space in Bourges, Calais, Chateauroux and Caen; and, in Spain, the regional government of Catalonia stated that the new group would have a 30 percent market share in the region when compared to the 20 percent average in the rest of Spain, and within some towns that figure would be as high as 70 percent. Internally, the merger created some collateral casualties. In Spain, George Plassat, Pryca’s CEO,6 announced his resignation after learning he was not expected to lead the merged company. In Portugal, Belmiro de Azevedo announced he was looking out for a partner to acquire Promodes’ 22 percent stake in Modelo-Continente after no agreement was reached on the price Carrefour would pay for Belmiro’s 70 percent stake. As Belmiro kept control of the joint venture, the entrance of a new partner was critical because, as he noted, “[the merger between Carrefour and Promodes] could create a strange partner/competition situation” because Carrefour was Modelo- Continente’s main competitor in Portugal.

17

In the beginning of January 2000, just after the millennium parties, the European Commission announced the deadline for ruling on the merger between the two companies was extended by two weeks to 25 January because France and Spain had sought referral of parts of the case. The two-week extension was mandatory when national authorities ask to rule on a merger themselves. Aware that these issues could delay the Commission’s decision, Carrefour, early on in the Commission’s one-month routine investigation of the merger, made concessions to satisfy EU worries about “upstream activities”.

On 25 January the Commission was supposed to rule on whether the concessions went far enough or on whether to open a full four-month investigation, thereby perhaps fatally delaying the deal.

On 24 January Carrefour named Leon Salto to succeed Luc Vandevelde as Chief Executive of Promodes after Vandevelde left to join Marks & Spencer.

Vandevelde’s expected role following the consummation of the merger was as second in command at the new Carrefour, under Chairman Daniel Bernard. The post would no longer be, said a spokesman. “Vandevelde had global ambitions,” said an analyst at Williams de Broe in London. “I’m not sure it was ever expected he’d be around for long.” Salto, previously a Managing Director for Promodes’ French operations, would head Carrefour France once the acquisition took effect.

On 25 January at 16:00 GMT the European Commission issued a press release conditionally clearing Carrefour’s purchase of Promodes, referring the rest of the deal to the French and Spanish authorities. However, neither of those reviews would have the power to stop the merger going ahead. An adapted version of that press release is reproduced in Appendix B. “The Brussels decision is good news for the group, for our collaborators, for our partners and suppliers and for our shareholders,” stated Daniel Bernard, the new group CEO after the EU announcement.

The New Challenge: A Global Market Means Global Competition

18

At the time the deal between Carrefour and Promodes was cleared by the EU analysts recognized that Wal-mart was under the threat of being left without the critical mass of stores in key markets to become a major European player. Its biggest Europeanholding, Britain’s Asda, was only one-fifth the size of the bulked up Carrefour. Equally, the merger highlighted Wal-mart’s need to counter Carrefour’s expansion in emerging markets. Only hours after unveiling the Promodes deal, Carrefour announced the acquisition of three Brazilian chains, boosting its market share in the country to over 20 percent, against only 1.4 percent for Wal-mart. The new Carrefour was now the number one retailer in Brazil, Argentina, and Taiwan, as well in France, Spain, Portugal, Greece, and Belgium Although Carrefour and Wal-mart had clashed head on in Mexico, Brazil, Argentina and Korea, they had respectfully stayed out of each other’s key markets. Carrefour withdrew from the United States after a first unsuccessful attempt in the 1980s and had stayed out of Britain and Germany, the two European countries Wal-mart had recently entered. Likewise, Wal-mart had stayed away from Carrefour’s strongholds in France and Southern Europe.

However that situation was expected to change as European governments moved to protect small merchants through the control of large new store openings. The only way to grow in Europe seemed to be through acquisition and, after Germany and UK, Wal-mart was clearly expected to target France. On the other hand, Carrefour lacked a presence in three key mature markets: the UK, Germany, and the United States, which would balance the risk of its investments in emerging markets. In fact, Daniel Bernard announced to a New York meeting of the National Retail Federation in January 2000 that “when one is the number two in the world, one cannot exclude a presence in the United States, nor remain indifferent to the changes in such a dynamic market that has grown 10 percent in volume.

Carrefour was watching the progress of Wal-Mart’s Supercenters closely, suggesting that the United States may be ready for French hypermarkets. “But you cannot start from zero. You have to get there via an acquisition,” Bernard coyly concluded. As the two chains were quickly moving toward a frontal clash, questions arose in observers’ minds regarding which chain was better prepared to win in an increasing global marketplace.

19

MARKETING AND PRICING STRATEGIES OF WALMART AND ITS COMPARATIVE STUDY Porter (2002) states that root of the problem lies in the lack of distinguishing between operation effectiveness and strategy. The expedition for productivity, quality and speed has resulted in management tools and techniques, total quality management benchmarking, time based competition, outsourcing, partnering, reengineering, change management. In any organization, strategy management is the key to its success. There are many theories based on this assumption that without a proper strategy and planning, it is difficult for any industry to survive irrespective of its size. It is necessary to understand here that all the major corporate organizations have established themselves, thanks to superior strategic planning and implementation. The retail industry is making news everywhere with not only the traditional industries increasing their outlets but some major corporate industries also intruding into this industry like Fresh @ Reliance of Reliance Industries, More of Aditya Birla Group in India. Wal-Mart, a US based retail industry, which is known as the giant in the retail industry has survived and is still the huge enterprise in the world which deals with almost all the F&B products, apparels, etc. It is not only the largest company in world but also the largest company in the history of world.(Fishman, 2006) The present paper is divided into four sections to understand and answer as what makes Wal-Mart the best in the industry, 1) retailing industry at the time of Wal-Mart’s innings, 2) Wal-Mart’s Competitive advantage and key components, 3) Wal-Mart’s Strategy and 4) Sustainable growth of Wal-Mart.

I. Retail Industry – Wal-Mart says Hello!

Strategic decisions are ones that are aimed at differentiating an organization from its competitors in a way that is sustainable in the future. (Porter, 2002) Porter strongly advocates that decisions in business can be classified as strategic if they

20

involve

some

innovation

and

difference

that

results

in

sustainable

advantage. According to Patrick Hayden et al (2002) the retailing industry adopted the style of discounting on its merchandise after the Second World War. It is learnt that discount retailing was not the strategy at the time Kmart, Target and Wal-Mart first started operating their business. Frank (2006) states that when Sam Walton was franchising for Ben Franklin’s variety store, invented an idea of passing on the savings to his customers and earning his profits through volume. Prior to Wal-Mart’s entry into the market, Sidney and Hebert from Harrison founded Two Guys discount store in the year 1946 which dealt in hardware, automotive parts and later on groceries. Two Guys was the forerunner as compared to today’s retailers like Super Target, Wal-Mart which succumbed to the economic recession. Another discount store set up by Eugene as E.J. Korvette, which is often cited as first discount store which did not raise from 5 & 10 cents roots and eventually declared bankruptcy due to inability to compete with the new entrants.

Porter (2002) states that combination of operational effectiveness and strategy is essential for superior performance which is the primary goal of any organization. He also says that a company can perform its rivals only if it can operate in different ways which are not in practice. Much emphasis had been laid on strategic positioning like variety based positioning, needs – based positioning and access based positioning.

Along with Wal-Mart, other stores that started operating were Target, Woolworth (Woolco) and K-Mart. However, Target has been functioning successfully, courtesy Wal-Mart, but other two failed in their operations and filed bankruptcy.( Michael Bergdahl, 2004) Porters five forces model explains what strategic decisions should be made and on what basis. The model explains the basic strategies to be considered while starting a business like bargaining power of suppliers. While franchising of Franklin he always looked for cheaper deals and thought of passing his savings to the customers and earning through the margin on volume of bulk purchases. Through the way of discount stores, shoppers were given the cheapest price as compared to any other store. In regard to threats of new entrants, Wal-Mart has been constantly in the news for acquisition of other

21

small retail shops in view of its expansion. But nevertheless it has stiff competition from likes of Super Target, Tesco, etc. it is the world’s biggest retail industry.

II. Key Components of Wal-Mart Business Model Wal-Mart is the leader in retailing industry with fiscal revenue of $244.52 billion in 2003 making it the world’s largest corporation. Mike reports that WalMart as of 2002 had 1,283,000 employees growing at 11.2%. The above data explains that strategy of Wal-Mart is extraordinary which manages and operates over 4150 retail facilities globally. The key components of Wal-Mart (The Value Chain), which offers cheap prices than its competitors includes firm infrastructure like frugal culture, no regional offices and pleasant environment to work.

Managements take lots of visits and it is learnt there are no rehearsals before any meeting which is usually scheduled on every Saturday. In any organization, human resource is the key to development and Wal-Mart efficiently manages its sources. Wal-Mart terms its employees as associates. Manager compensation is linked to the profit of store operated by him, within promotions, compensation offered to associates depending on company’s profits and also offered some incentives on their performances. The workforce at Wal-Mart is not unionized as the company takes all the measures of their benefits and provides them training on related issues.

Technology plays a vital role in development of the organization and Wal-Mart is well equipped with technological innovations like POS, store performance tracking, real time market research, satellite system and UPC. Wal-Mart procurement measures like hard-nosed negotiations, partnerships with some vendors, centralized buying, planning packets, etc. helps at large the cause of providing the goods and services on cheap prices. The other factors that increase the margin of profit for Wal-Mart are inbound logistics with frequent replenishment, automated DCs cross docking, pick to flight, EDI, hub and spoke system. Wal-Mart strategy of operation is innovative with big stores in small towns with monopoly in the market at low rental costs, local prices, concentric expansion, merchandising in brand name, private labels, little space for inventory,

22

store within store, etc. In relation to marketing and sales, merchandising is tailored from locals, spent less on advertising and the prices are fixed low and it depends on the store manager to fix the latitude of pricing. All the above factors combined together form the key components of Wal-Mart which not only increase the margin of profits through bulk sales but also boost the confidence of the customers with services like point of sale information system and everyday low prices.

III. Wal-Mart Strategy Wal-Mart dominates the American retailing industry due to number of factors like its business model which is still a mystery and its effectiveness in not letting the rivals let know about the weaknesses. Wal-Mart made strategic attempts in the its formulation to dominate the retail market where it has its presence, growth by expansion in the US and Internationally, create widespread name recognition and customer satisfaction in relation to brand name Wal-Mart and branching into new sectors of retailing.

It is learnt that Wal-Mart strives on three generic strategies consisting of Focus Strategy, the Differentiation Strategy and overall cost leadership. Managers strive hard to make their organizations unique, distinctive and identify key success factors that will drive the customers to buy their products.Thus, firm specific resources and capabilities are crucial in explaining the firm’s performance. The Resource Based View (RBV) explains competitive heterogeneity based on the premise that close competitors differ in their resources and capabilities in important and durable ways. The company’s capability can be found through its functionality, reliable performance, like Wal-Mart superior logistics. (Helfat, 2002) Wal-Mart has firm infrastructure, well equipped in human resource with management professionals and technologically too.

Any organizations thrive hard to be successful for which it needs to have better resources and superior capabilities. Wal-Mart has strong RBV with economically and financially very strong enough to stand still in the time of crisis. Pereira states that dominating the retail market is its key strategy. Wal-Mart operates on low price strategy which is operated as every day low prices (EDLP) which builds 23

trust among the customers.(Brunn, 2006)The strategy lies in purchasing the goods at lower prices and selling the goods to customer at much lower prices, cutting the price as far as possible and increasing the profit by increasing the number of sales.

This ferociously increases the competition in the market and Wal-Mart competes with all its competitors till it is dominant it the market.

Wal-Mart is expanding seriously and rapidly which is also its strategic goal. WalMart employs over 1.3 associates, owns over 4000 stores out of which 3000 are in US and serves around 100 million customers weekly. Wal-Mart has acquired many international stores and merged with some super stores like ASDA in UK. Wal-Mart far flung network of retail outlets has ensured that Wal-Mart interacts with and has impact on virtually every locality within US. (Helfat, 2002) The expanded strategy has led the hunger of Wal-Mart to many European Countries. It is learnt that three countries with no Wal-Mart stores became part of corporation’s international presence wherein the domestic retail chains were taken over by Wal-Mart including 122 Woolco stores in Canada, 21 Wertkauf stores in Germany and 229 ASDA units in United Kingdom. The takeover strategy by WalMart keeps the company at forefront when entering into the new market and the number of competitors is also minimized. The strategies have helped the WalMart to rein in number one position in international countries making it the largest retailer in the world.

It is seen that Wal-Mart has significantly the Porters five force model wherein through proper strategic planning and strategic implementation has led to removal of barrier entry, rivalry from competitors and pricing norms. In regard to substitutes, Wal-Mart in order to achieve its aim of customer satisfaction has selling goods under its own legal brand.

Wal-Mart’s big box phenomenon has changed the retailing industry in the United States which is often considered as discount stores and makes profit through high volume of purchases and low markup on profits.(Parnell, 2008)Wal-Mart with its low cost and ever expanding strategy has made a dramatic impact since 1962 when Sam Walton first started his business. With this strategy, Wal-Mart has now

24

over 4000 stores and outlets in US and other countries through acquisition and mergers.

IV. Sustainability in Discount Retailing – Wal-Mart According to Porter, (2002) operational effectiveness and efficiency are the key elements of success in any organization. A company can outperform its rivals or competitors in the market only with superior management and efficient control creating a difference from the others which eventually attracts customers. Porter defines operational effectiveness as perf ormance of similar activities as its rivals but better than them. In a study, it is stated the Wal-Mart is expert in manipulating perceptions. It is termed that low price is not the strategy of Wal-Mart but the advertisement manipulates the consumer perceptions by making them think that its prices are lower than its competitors’ price using ‘price spin’. Wal-Mart makes the consumer addicted coming to its stores by convincing them the prices are lower than in the other stores by selling itself cheaper by advertising that ‘we have lower prices than anyone else’ and placing a ‘opening price point’. The ‘opening price point’ is the lowest price in the store which is kept at high visibility which makes consumer believes that the products in this store are really cheaper. (Race Cowgill, 2005) The SWOT analysis of Wal-Mart reveals that it is most powerful retail brand, reputation for money, value, commitment, and provides wide range of products. It is growing at a brisk pace with expanding its horizon to other parts of world through acquisition and merger. Wal-Mart has good opportunities in markets of Europe and China and focuses on acquiring the market through acquisition of smaller stores and merger with leaders in the specific markets. Wal-Mart is always under threat to sustain its top position in market nationally and internationally.

Global leader in the industry leaves the organization vulnerable to many socioeconomic and political problems of the country.

Sustainability at the top place is the most important job that makes its managers strives hard to frame the policies and strategy to compete with its rivals in the

25

market. Slack, Imitation, Substitution and Hold-up are some of the threats to any organization in retail industry. However, Wal-Mart with its visionary goal of attaining zero waste status and reaching 100% renewable energy has planned to launch number of sustainability initiatives. (GreenBiz, 2008) Imitation increase profits by increasing the supply. But imitation puts reputation, relationship at stake. James Hall reports that Wal-Mart is planning to open convenience stores as Tesco has started and operating in US called Fresh & Easy Neighbourhood Markets. (James, 2008) Such tactics will create mixed response among the consumers while degrading the reputation of the leader in market. Substitution reduces the demand for what a firm uniquely provides by shifting the demand elsewhere due to changes in technology. The threats of substitution can be subtle and unexpected like minimizing expenses through videoconferencing instead of air flights to long distance meetings with its managers of other stores, etc.

Therefore, substation is an especially effective way of attacking dominant rivals in the market. Substitution offers mixed responses after identifying and understanding the threats. The organization should fight the threat and merging with them, switching to different options of substitution to be in the market. Holdup diverts the value to customers, suppliers or complementors who have some bargaining leverage which results in tough negotiations, contractual agreements and vertical integration.

Wal-Mart is having great network with almost over 7800 stores and Sam’s Club locations in 16 markets worldwide. It employs more than 2 million associates and serves more than 100 million customers every year. According to Fishman (2006) Americans spend $26 million every hour at Wal-Mart which makes it believable that Wal-Mart is financially very strong and is capable of combating any threat from its rivals in the market. Wal-Mart is ever expanding its boundaries by way of acquisition and mergers. Thus Wal-Mart with such a vast network of stores and alliances in the forms of ASDA, Target and many other stores is well protected enough to sustain its top position in the retail industry.

Today’s modern retailer of fast-moving consumer goods faces more pressure than ever to compete and succeed. Understanding the impact of an optimization-

26

enabled price strategy and the powerful options that this strategy can unleash empower retailers to achieve new levels of business success.

This paper addresses the critical role pricing strategy should play for retailers of all sizes. As advances in science and technology allow retailers to integrate realtime consumer demand data, competitive activity, along with pricing rules, creating and implementing a sophisticated price strategy is emerging as a powerful opportunity for retailers to increase revenue and profit. By leveraging the intelligence and discipline of the latest price optimization tools, along with the insights of a qualified price strategist who is responsible for the design and management of the strategy, retailers can find real opportunities in at least five areas of practice.

Why Is a Modern Price Strategy So Important?

To survive and thrive in the highly competitive retail world, retailers must become more attentive and meticulous with their pricing. More than ever before, the financial success of companies selling retail goods depends on their price strategy.

Consumers demand fair prices in exchange for their business and are constantly comparison shopping. With the ever-present pressures from shrinking margins, rising costs, and competition, winning in the retail arena today demands price strategies that reliably and frequently guide retailers’ decision-making.

New advances in price optimization science and technology offer retailers an unprecedented opportunity to align pricing policy with strategic business objectives. Aligning business goals and pricing policy seems common sense, but too often retailers lack the insight and technical ability to plan and price strategically. Instead, retailers too often rely on a basic “costplus� strategy to maintain margins, follow their competition, or adopt wholesale-supplied pricing.

Smart retailers know they should set prices in line with their own business objectives instead of simply reacting to competitors, cost changes, and margin objectives.

27

Competition is by no means removed from the equation in a modern, optimization-based price strategy. But modern price strategies reflect an analytical, big-picture approach. They include a far wider variety of factors such as pricing gaps, ending number psychology, brand sensitivity, and product movement. These factors enable retailers to manipulate pricing to align with their broader strategic business objectives. These options were previously not available in traditional pricing systems.

When competitors introduce a new product or slash prices, retailers who have developed a strategic-level pricing regime can respond with a multitude of options. The first and most typical option might be to respond immediately with similar changes. However, an optimization-based strategy can introduce additional options for retailers, providing them a deeper understanding of the long-term financial impacts of reactionary changes. Optimization environments can suggest alternative actions to make up for those losses caused by fierce competition.

The ability to accurately predict consumer responses to certain changes enables this new strategic thinking.

This typical situation is one of many constants in the retail environment. Will there always be loss leaders? Probably. Will there always be profit sacrifices on certain items? Most likely. Will shrink and other cost issues erode margin? Again, probably. None of these, however, should deter retailers from adhering to their pricing strategy to minimize these short term negative effects over the long-term.

A solid strategy factors these elements into the equation and still delivers value to the customer. In the end, price strategy must accomplish its objectives without negatively impacting customer expectation and perception. AMR’s Research Director Mike Griswold recently wrote, “Retailers need to articulate (internally and externally) their price message and position. These statements provide the guardrails that guide pricing tactics across the organization. Without these guidelines, organizations can get into schizophrenic pricing practices that confuse the customer.�

28

A modern pricing policy must vigilantly protect the consumers’ perception that they are choosing the best place to shop for their families. Consumers who are confused by non-palatable prices tend to shop elsewhere. Many retailers inadvertently confuse customers by setting prices without a comprehensive policy, by being reactionary to competition or pricing strictly on margin goals. Although few customers may be able to articulate why they feel confused in a given retail environment, research from the Wharton Business School indicates that consumers typically rely on three reference points when determining what they think is a fair retail price: 1) How much an item cost in the past; 2) How much competitors charge for the same item 3) Their perception of the associated costs of selling an item.

Relative to other areas of business improvement, creating and deploying a strategic pricing regime can produce higher returns compared to other loss-control efforts. Wharton Professors Z. John Zhang and Jagmohan S. Raju documented an important statistic in a recent research paper: A one-percent reduction in fixed costs boosts profits 2.3 percent; a one percent increase in volume will result in 3.3 percent increase in profits; a one-percent reduction in variable costs can produce a 7.8-percent rise in profit; but a 1percent improvement in pricing will boost profits by a whopping 11 percent.

The Wharton research validates what new-era price optimization strategists have asserted since 2005: pricing is one of last retail frontiers where significant gains can be immediately realized with proper strategy, technology, and support.

COMPARATIVE STUDY Marketing strategy of Carrefour Walmart and Carrefour go neck to neck as far as size and success are concerned.

The marketing mix looks at the four main factors that go into a marketing program (Product, Price, Place, Promotion), which are referred to as the 4 Ps. Let’s take a closer look at these different factors.

29

PRODUCT The Carrefour Group needs to design their stores so that they meet customers need. This includes having the right store format, helpful services, the appropriate product mix, and a reliable private-label brand.  Developing new store formats The group’s aim is to attract the greatest possible number of people to their retail stores. As different market segments have different needs, they need to have different formats of retail shops to fulfil these needs. For instance, elderly person often do not have a car and live alone, so they need a store near their house: they need district shops. However, large families with children are looking for hypermarkets where they can buy goods at a cheap price, just once a week. In 1963, Carrefour opened the first ever-built hypermarket in Sainte-Genevièvedes-Bois in France. The concept was to build a retail facility which carries under one roof both groceries and general merchandise. Thus, a consumer can normally satisfy all of his or her routine weekly shopping needs in one trip to the hypermarket.

The Carrefour Group has recently tried three new store formats.

They have renamed supermarkets into “Carrefour Express” and change the offer of products. They have used the well-known Carrefour trademark (the logo and the brand name), just adding the word “Express” to show that it was not the same as a traditional Carrefour: these new types are supermarkets, and not hypermarkets. It enables customers to know they can find Carrefour brand products there (a third of the 6,700 different products), at hypermarket prices. This transformation has been highly successful with an increase in sales of 30% since the change of trade name.

Champion Urbain stores are designed to respond to a new type of customer: those who live in town centres, do not have cars, are often young and affluent, and always in a hurry. Thus, the stores are set up for self-service to enable quick shopping. They are open from 9 a.m. to 9 p.m. to accommodate city dwellers’ 30

pace of life while Champion supermarkets often close during the lunch break, and close much earlier in the evening.

MaxiDia are new hard discount stores that offer a more diversified product mix than traditional Dia.  Expansion of services Carrefour launched last year a new “self check-out” system which offers customers the option of scanning their purchases themselves, paying for them at automatic checkout facilities and then bagging them themselves. A cashier is on hand for every four automatic check-out modules to offer guidance and assistance to customers. This concept answered the customers’ desire to spend less time at the checkout counter.

In 2005, it was the concept testing phase, so it was only launched in three stores in France. Satisfaction surveys have been made and prove that this is a good idea, so they launched it in other stores in 2006. Carrefour already offers many services such as travel services. The group keeps expanding existing services and developing new ones. The Group tries to find innovative and helpful services.

They designed an easy-to-use interactive terminal called “Easy media” which makes customized products. It allows customers to chose songs among a music database (which comprises thousands of titles), and to make their own compact disc, right at the store. As France’s second largest petrol retailer, the Carrefour Group has 1,167 service stations in France, including 24 service stations on the motorway network.

Carrefour also offers a heating oil delivery service. In just three years, this service has won 170,000 customers.  Expansion of the product range In French hypermarkets, the number of product listings increased by 6% in the grocery department, 7% in cosmetics and 8% in fresh products between 2004 and 31

2005. The Group has also done an environmental scanning and found that various factors have changed the demand in Europe.

Economic factor: People devote a greater share of their budget to non-food products.

Technological factor: There is a lot of innovation in telephone products and household appliance, thus people feel the need to replace these products on a regular basis.

Socio-cultural factor: Trends in textile products are quickly changing, thus people like to buy new ones frequently.

The group has responded to these factors by offering a wider and better range of non-food products (selection competition): the number in listings have doubled in 3 years. ďƒ˜ Adapting products and services to local markets The Group has clearly done a geographic segmentation of the market as range of products and services offered in the stores depends on the country where the retail store is located. They have adapted the kinds of products they sell to the local culture. For instance, Chinese people do not always have a huge refrigerator, so they appreciate fresh products. In China, products in open-air markets are not always hygienic and convenient. Thus, Carrefour, by guaranteeing both prices and quality for lots of fresh products has a real advantage: it is much easier and practical to buy fresh goods. Moreover, in Carrefour Gubei in Shanghai, they also sell western products for the western people living there. This market segment needs were not yet fulfilled, as western products are not sold elsewhere. In Carrefour Gubei, expatriates can buy such goods as chocolates, wine, and even cheese or cookies just like in France.

The group also adapted its services to local shopping habits. For instance, in France, people often drive to hypermarkets, only once a week. They buy 32

everything they need for the week, and a car is very useful to transport the goods back home. That is why big parking lots are needed. Nevertheless, Chinese people have different shopping habits. Most of them do not have a car, but lots might use a taxi to go home. Thus, in Shanghai, there are only very small parking lots, but there is an underground taxi station.  Developing private-label brands Although the Carrefour Group sells a lot of goods with a manufacturer’ brand names (such as Danone, Yoplait or Nestlé), they also sell dealer (private-label) brands: Carrefour (in Carrefour hypermarkets and Carrefour Express supermarkets), Champion (in Champion supermarkets) and Grand Jury (in convenience stores). Thus, these products do not carry the manufacturer’s name.

The Carrefour product range now includes 11,000 mass-market products and miscellaneous household goods. They have paid a special attention to the packaging so that the brand is immediately recognizable. It has a special colour code, displays the Group’s quality commitment, complete labelling information and a display of the Group’s “satisfaction or your money back” policy.

There has also been a transition from mass marketing to targeted marketing, through the addition of Carrefour Agir products and Carrefour Sélection products.

The Carrefour Agir range includes three products lines for three ways of consuming: - Agir Bio (targeted to those who want to encourage biological agriculture) - Agir Nutrition (targeted to consumers who want to protect their health) - Agir Fair Trade (targeted to those who want to encourage economic responsibility to suppliers) In order to improve these brands’ equity, they use widely recognized labels to promote trust among customers. For instance, the 300 products of the Agir Bio line are certified by the independent certification body Ecocert.

33

The brand loyalty is very high. The Carrefour brand is the best-selling brand in Carrefour hypermarkets, representing 25% of the total sales. Nine out of 10 customers fill their shopping carts with Carrefour brand products.

Wal-Mart's everyday low price program, abetted by low operational costs and tight control on expenses, has resulted in the discounter earning a nationwide reputation as being the lowest priced retailer in market after market. Pricing surveys conducted by Discount Store News and security analysts, for the most part, support this conventional retailing wisdom. These surveys also show that: 1.) Wal-Mart is especially sharp when it enters a new market as it strives to quickly establish its low price image; 2.) Other discounters are forced to be more price competitive as they seek to retain their market share, even beating Wal-Mart on selected items, and 3.) Wal-Mart has higher prices when it doesn't face other discounters in a highly competitive situation.

The surveys detailed in the following charts illustrate these pricing trends. The surveys were conducted in six different markets during the past five months and matched Wal-Mart and the other leading discounters in each area, with Kmart as a factor in five markets, Target in four, Bradlees in two and Caldor and Smitty's in one each.

Wal-Mart's use of low prices to entrench itself in a new market is evident from the Middletown, N.Y., survey conducted by DSN (top). The discounter entered the market a few months ago and it was sharply lower on all 24 comparable items tracked against Caldor and Bradlees, both of which are less than a mile away and have been remodeled. Overall, Wal-Mart's market basket of items was 20.6% lower than Bradlees' total and 19.5% below that of Caldor. The Greater Tampa Bay, Fla., market survey (left) illustrates Wal-Mart's approach in competitive and non-competitive situations. The tracking reveals that the three chains have achieved price parity except in cases where Wal-Mart is side-by-side with a competitor. The four stores in the market are located near Interstate I-75. Wal-

34

Mart's Sun City Center/Ruskin store stands alone in an affluent area made up almost entirely of retirees. It's about 15 miles away from the Seffner Wal-Mart, which is located between and competes directly with Kmart and a new Target within a five mile radius. Seffner is a lower middle class, blue collar neighborhood, with a large farm population on the outskirts. Wal-Mart's Sun City store prices generally were higher than its Seffner unit and Kmart and Target. The 17 comparable items cost the most in Wal-mart's gun City store and overall were 1.7% higher than the discounter's Seffner unit, 5.9% more than Target and 2.2% above that of Kmart. Among the 29 items that are carried by at least two discounters, the two Wal-Marts together had the lowest price on 12, Target on eight and Kmart on seven. Wal-Mart's price advantages were mainly concentrated in the Seffner store, where the manager had clearly attempted to undercut Kmart by a penny or two. The only significant price differences are found in Target, which undercut the competition by much more on the items it was lowest in.

Target, the new player in the market, has been a big hit, mainly because of its fashion approach. Also, its stores are newer than the competition.

Wal-Mart, Kmart and Target in Phoenix have basically achieved price parity on the 16 comparable items among the 33 products checked at the trio as well as at Smitty's, the local combo discount/supermarket chain. The difference between Wal-Mart at the low end for the comparable products and Target at the higher end was just $1.57. Smitty's, however, wasn't in the ballpark, with its comparable market basket more than $15 higher than the other three discounters. The Phoenix survey was another example of Wal-Mart staking out the low price position against all competitors. It was lowest on 10 of the comparable items, while Kmart was lowest on six and Target on four. When the four chains are measured in cases where at least two carried the same item, Wal-Mart was lowest on 21, Kmart on 10 and Target on seven. Wal-Mart prices according to the market and this is evident in Phoenix, a higher priced area than others surveyed. Wal-Mart's tags tended to be higher in Phoenix than in areas where it is also well established. In Phoenix, its 16-comparable-item market basket at $63.81 was higher than a 17comparable-item market basket in Tampa Bay, which cost $45.59 at one WalMart and $44.82 at another Wal-Mart.

35

Wal-Mart and Kmart are slugging it out price wise in Las Vegas, with Target an also-ran. Of 22 items price checked among the trio, 14 were found in all three and Wal-Mart was lowest on six, Kmart on seven and Target on just one. But this doesn't reveal the whole story. The overall market basket total for these comparable items was actually lower at Wal-Mart, $83.56, than at Kmart, $89.12, with Target highest at $98.32. In Las Vegas, a relatively new market for WalMart, the discounter isn't just competitive but sharply priced on many items and it shows on its overall lower comparable market basket total. Wal-Mart was also lower on eight items that were carried by at least two of the discounters in the market, while Kmart was lowest on 11 and Target on four. Wal-Mart is picking its products to drive home a low price image in Las Vegas. The city is also a high priced area and Wal-Mart's tags are targeted to the market. Its comparable 14 item market basket cost $83.56, higher than a 16 item comparable market basket in Phoenix, another high cost market, or a 17 product comparable market basket in Tampa Bay, Fla. Wal-Mart has staked out a position as the low priced discounter in Boca Raton, Fla., by offering the lowest price on 17 comparable items. Kmart and Target each are lower on four products. But this Wal-Mart "win" isn't as overwhelming as it seems. In reality, the discounter often is just pennies, rather than dollars, under competitors. The total amount of Wal-Mart's market basket for the 25 priced checked comparable items came to $157.07, just $2.25 less than Kmart's market basket and $6.35 under Target's total ticket. Salomon Bros., the brokerage house, used another measurement - variance from average price - to indicate Wal-Mart's low price position. Salomon Bros.' analysis "shows that Wal-Mart is the price leader in the market with an average variance of 1.7% below the average total price [of items in the market basket]." The brokerage house's analysis also showed that Kmart was 0.7% below the average total price for the comparable products while Target was 2.2% above the average total price. In Boca Raton as in a number of other markets, Kmart has responded to Wal-Mart's pricing challenge with lower prices, while Target has used other strategies.

When Wal-Mart entered New Jersey, Berlin was one of the first markets in which it opened a store. The discounter's pricing strategy was to use lower prices to

36

carve out a market presence. The move paid off: Wal-Mart had the lowest tags on 27 of 34 comparable items tracked in the market, while Kmart was lowest on 11 and the duo tied on four products. Bradlees, the third player in the market, wasn't lowest on any merchandise. Wal-Mart's total tag for the comparable items works out to a cost of $186.90, or $3.55 lower than the $190.45 total price for the merchandise at Kmart. Bradlees' total price of $235.42 was 20.6% higher than Wal-Mart and 19.1% higher than at Kmart. A comparison of Wal-Mart's prices in Berlin and other markets shows a wide variation, while Kmart's tags show less differences. This reflects Wal-Mart's greater push to be the lowest priced retailer in a market - even if the "savings" is a few pennies - and the readiness of local Wal-Mart managers to drive down tags to accomplish this goal. But other discounters aren't giving up the pricing field to Wal-Mart. In Berlin, Wal-Mart's total price was 9.3% below the average total price of the market basket of comparable items, while Kmart was 7.2% lower than the market basket's average total price.

Essential Components of a Modern Price Strategy Establishing a formal pricing strategy is a long-term commitment to a set of over arching business goals tied to a set of decision-making processes, technology, and actions. These four attributes characterize today’s most effective pricing strategy:  Embraces a long-term approach that creates a perception of value in the customers’ minds  Balances short-term, proactive tactics with long-term margin enhancements in other areas  Contains well thought-out and imbedded mechanisms for measurement, evaluation, and course-correction Ultimately delivers the corporation’s financial goals

Science and Technology as Catalysts to Pricing Systems Price optimization science is maturing rapidly – and being applied to retail environments in ways that most retailers had never thought possible. The

37

challenges of managing multiple zones, the proliferation of items and formats both internally and externally, dictate a new approach. Retailers using older, singlethreaded, rules-based systems, or who still rely heavily on spreadsheets or tables are finding that they cannot keep up with cost changes and competitors. The decision to evolve pricing from “gut” feel or “follow-the-leader” strategies is, for many retailers, a daunting but essential first step in order to maintain profits and customer perceptions of value. For those who decide to develop true pricing strategies, however, technology can provide significant risk-mitigation as well as comfort (in the form of experienced and committed implementation support, depending on the vendor chosen).

Technology is more important than ever in creating and executing a pricing strategy. The best systems allow retailers to regularly review market factors and change prices. They can look at large numbers of items easily and respond rapidly to market changes. For example, competitive data should not stale waiting for review but can be acted upon as collected. Science-based optimization systems now enable retailers to measure the effectiveness of system-recommended price changes and adopt new tactics as the system interprets results. Retailers should train their pricing managers to understand and act upon the new systems’ feedback. This should be the top priority of any company adopting a strategybased pricing system to meet the corporation’s financial obligations.

The Human Element Dedicated human resources are another essential component, worth discussing.

Retailers should empower individuals to learn, monitor, implement, and adjust the company’s pricing. Empowerment should be coupled by the appropriate authority and accountability that convey the role’s importance. Multiple layers of decision makers in multiple departments often blur the purpose and unison of the strategy.

Total responsibility must reside in one department with those goals being visible across the entire organization. This is a key area that often requires change management activities if responsibilities are adjusted in any way. Other employees are also a part of the equation. Communicate the strategy’s importance

38

and purpose because evolving traditional ways of thinking and implementing a new pricing system must occur on an organizational level. Internal buy-in and understanding leads to a more consistent, less-ambiguous set of communications to the public. Although prices themselves represent one important channel of communication to customers, public-facing employees can also help or hinder this communication.

Measurement and Adaptation It’s one thing to develop a powerful strategy or deploy a robust optimization system, but many retailers find execution and measurement equally challenging.

To some retailers, price recommendations generated by their optimization systems make perfect sense on paper, but when several hundred or several thousand price changes occur every week, they need the reassurance the system is working.

Many leading software products can determine the impact of price changes on consumer demand cycles and profit margin, but without a process in place to evaluate and implement changes, many such opportunities go unnoticed.

Therefore, retailers must choose a system that measures the impact of their price changes. Retailers need to regularly measure and evaluate these results, to ensure not only pricing consistency (a key factor in generating increased revenue and profit) but also to codify the system’s importance to the entire organization.

Pricing is a very personal activity. It represents the relationship to the community, suppliers, and manufacturers, and the results create the corporation’s financial report card. It is serious business.

Key Opportunities to Leverage Price Optimization Most retailers understand that being competitive on price-sensitive items helps build store traffic. But staying competitive on price-sensitive items can result in minimizing or sacrificing profit on those items. So, how can retailers attain profitability and maintain a competitive footing? Emerging price science helps retailers create a personalized strategy in a wide variety of dimensions. Below are five key areas of opportunity that can be leveraged to maintain financial stability 39

over the long term. A thorough price strategy incorporates each of these components.

Zone Analysis Many retailers already practice grouping stores into zones. These groups were originally set up using a cost-to-serve model driven by geographies, distribution centres, or critical suppliers. Retailers today sit on both ends of the spectrum with only one zone or too many to manage.

Determining an optimal price strategy through zone configuration requires a deep understanding of many factors, including cost. Cost serves an important purpose, but certainly should not be the only factor. Even retailers with several outlets in one geographic area do not have identical economic, cultural, and demographic identities within every store. These differences become evident with basic price elasticity studies. Such store specific insights can empower a retailer to anticipate and react to factors such as job growth, housing, and other economic trends that can greatly impact consumer price sensitivity and competitive activity. For example, the price of a large bag of fl our is highly sensitive in a Hispanic family community, where baking and cooking at home are a way of life versus a community of homes with no children or parents who often travel and seldom cook at home. Both of these extremes exist in the same cities and states across the country. Why rely then on just one factor to set pricing?

Category Groupings Retailers tend to apply a general margin goal to categories of like items when using price management systems. This is largely a function of how earlier pricing software was written, in accordance with historically popular rules-based approaches to pricing. Mature category management systems, new product

40

innovations, health and wellness attributes, green products, and convenience foods are creating opportunities with new segments within standard categories. Today, it benefits retailers to look inside categories for margin opportunities. For example, the rise in popularity of specialty teas has put those items in a category of their own, capable of performing much better than the general category of coffee and tea. Retailers who lack insight into these buying trends miss opportunities to reshape a price strategy.

New-era price optimization systems are designed to consider how categories and product groupings should be priced and manage them much easier than older systems. By breaking up traditional categories and price families, and creating groups based on product benefit, health and organics, or convenience, retailers create profit opportunities in areas not typically leveraged in the past.

Creative Pricing Creative pricing pushes consumers into action when they consider making a purchase. “Should I buy it now or later?” is a question that too often is answered, “later.” “Should I buy one or two?” Is often answered by “one”. For items not promoted through advertising, retailers can build their pricing strategy to leverage specialized, creative appeals that drive product movement based on the perception of added value or savings.

Successful retailers in every market use tactics like offering better single price points only if multiple purchases are made, cash discounts for purchasing a “suite of products”, discounts on fuel for purchases made in-store, and any other strategies to generate larger orders and take customers out of the market on key items. Since these prices are built around large purchases, smaller orders can become more profitable as those offers do not apply. These tactics MUST be supported by:  Clear, simple communication to both employees and customers.  A great in-store merchandising program

41

Such tactics can help convert part-basket customers into full-basket customers.

Private Label Private label brands and strategies are evolving quickly. Retailers have learned that a good private label strategy pays off big dividends in customer loyalty, margin enhancement, and category control over national brand manufacturers.

Retailers should be aware of the emerging best practices in pricing private label.

Supporting private label growth should be top priority in time and management as it adds profit at a much higher rate than any other category in retail. Establish an ideal price gap between private label and national brands, recognizing the consumer will evaluate the core suite of items (by size). Support a value-price perception by adopting both long-term and seasonal pricing practices that capture margin targets. Avoid line pricing organics or “better for you” products with mainstream items. They offer additional benefits and have competitive items of their own to take into consideration.

Private label also enables retailers to fill a hole in their product mix with the added benefit of not being subjected to a direct-price comparison by developing new products of a different size, added features, unique flavours, or even different packaging. This practice has resulted in multiple tiers of private label offerings but has some private label items taking on the popularity of a national brand with consumers. By having a comprehensive data file that can be intelligently and systematically analyzed, retailers can “reverse engineer” price gaps to identify the right size and package for their new private label initiatives. Set a competitive price that generates better-than-average margins.

In terms of managing gaps between multiple private label tiers, a consistent and purposeful price strategy is critical.

Vendor Management 42

What is the message you send to your customers when they stand in front of your shelves? Does the message “shout” about a specific brand? Or does it shout about your price/value message?

Retailers have grown understandably reliant on manufacturers and distributors for guidance when it comes to pricing and shelf management. After all, vendors have traditionally been a great source of information. Their size and experience has given many vendors a deep knowledge base of customer behaviours and category trends.

But sophisticated, analytics-based pricing technology now empowers retailers to take control - and with good reason. Retailers’ and vendors’ motives are often similar, but not the same. A retailer with a well-reasoned pricing strategy and reliable data is suddenly in a position to negotiate effectively towards common goals.

Retailers who leverage technology end up being better supported by manufacturers and distributors. The retailer provides reliable pricing leadership by aligning pricing to longer-term goals and strategies that, by and large, account for manufacturer best interests. By making item optimization metrics available, retailers can negotiate meaningfully with vendors and manufacturers. As an example, retailers whose price optimization systems generate customer demand curves are equipped to talk on-par with manufacturers or vendors on performance criteria, promotional vehicles, floor placement, item authorization, or cost increases. When negotiating with vendors, understanding product demand factors based on different strategies offers a powerful tool.

Conclusion The old adage “knowledge is power” is once again proving true in the arena of retail price optimization. The historic reliance on human knowledge to set pricing

43

is now giving way to tried-and-true price optimization science. This new retail knowledge source is arriving just in time. Broader economic and societal pressures and competition from larger, increasingly sophisticated retailers is forcing retailers of every size to develop and execute strategic, proactive pricing.

Truly leveraging the technology that generates the kinds of insights outlined in this paper requires more than an organizational commitment and a purchase order; it requires a consultative approach to creating a comprehensive price strategy designed for the unique needs and objectives of each retailer. As was the case with earlier generations of software that were capable of doing much less, the new generation software is only as good as its users and their customer data. As such, a pricing consultant who not only understands the potential of the software, but also can train others to use it, should carefully guide the early stages of adoption.

Constant measurement must be in place along-side a long-term price strategy which incorporates these important feedback loops from the consumer. Over time, as the system learns, profit building opportunities will explode.

44

WALMART’S STRATEGIES FOR GROWTH Walmart has made its way into the Indian market with the opening of its first retail outlet in Amritsar, Punjab. Walmart has a tremendous success story all across the world. Its low pricing strategy has yielded unbelievable results all across the world. Walmart’s success is governed by its understanding of the market it enters into. Before India, Walmart has had a tremendous success in China. All it’s policies created wonders for the management and since most of the characteristics between India and China are almost the same, it may enter into the Indian market with similar strategies.

Founded by Sam Walton, the first Wal-Mart store opened in Rogers, Arkansas, in 1962. Seventeen years later, annual sales topped $1 billion. By the end of January 2002, Wal- Mart Stores, Inc. (Wal-Mart), was the world’s largest retailer, with $218 billion in sales. Wal-Mart’s winning strategy in the U.S. was based on selling branded products at low cost. Each week, about 100 million customers visited a Wal-Mart store somewhere in the world. By 2004, Wal-Mart, the world's largest company operated discount stores, neighbourhood stores, hypermarkets (Wal-Mart Super centers) and membership warehouses (Sam's Club). In the 1990s Wal-Mart started to expand abroad. It entered China in 1996, Korea in 1997, and Japan in 2002. In China, Wal-Mart operated and aggressively expanded its retail business in partnerships, joint venture partners and suppliers. In Japan, Wal-Mart invested in 2002 in Seiyu, a prominent Japanese retailing chain. In Asia Wal-Mart is engaged in tough competition with other global and domestic retailers. The author’s intention of writing this case study is to explore into the complexities of Wal-Mart’s Chinese venture. China poses a huge challenge for Walmart as there exist cross cultural diversities among the Chinese population. Walmarts needs to

45

understand the Chinese market first and then think of a business model that can fit the country.

Thus the case aims to explore into the (1) Competitive strategy of Walmart in China and (2) Understand the adaptability of its business model to international environments.

We are collecting data from secondary sources and resorting to some focus groups and about 7-8 in-depth interviews with Industry experts to understand the situation in a better way. The objective of taking up this research work is to comprehend the strategic challenges that the world number one Retailer Walmart faces whenever it attempts to enter international markets so that it can leverage on the untapped potential. Thus China is a very lucrative destination for any retailer in the world due to its huge growing population. Thus our study revolves around Wal-Mart’s competitive strategy in China and how it is adopting its business model in China.

Basic History Overview Wal-Mart's history is one of innovation, leadership and success. It started with a single store in Rogers, Arkansas in 1962 and has grown to what is now the world's largest – and arguably, the most emulated - retailer. Some researchers refer to Wal-Mart as the industry trendsetter. Today, this retailing pioneer has annual revenues of over $100 billion, 3,000 stores and more than 750,000 employees worldwide. Founded by Sam Walton, the first Wal-Mart store opened in Rogers, Arkansas, in 1962. Seventeen years later, annual sales topped $1 billion. By the end of January 2002, Wal-Mart Stores, Inc. (Wal-Mart), was the world’s largest retailer, with $218 billion in sales. Wal-Mart’s winning strategy in the U.S. was based on selling branded products at low cost. Each week, about 100 million customers visited a Wal-Mart store somewhere in the world. By 2004, Wal-Mart, the world's largest company operated discount stores, neighbourhood stores, hypermarkets (Wal-Mart Supercenters) and membership warehouses (Sam's Club). In the 1990s Wal-Mart started to expand abroad. It entered China in 1996, Korea in 1997, and Japan in 2002. In China, Wal-Mart operated and aggressively 46

expanded its retail business in partnerships, joint venture partners and suppliers. In Japan, Wal-Mart invested in 2002 in Seiyu, a prominent Japanese retailing chain.

In Asia Wal-Mart is engaged in tough competition with other global and domestic retailers. The authors intention of writing this case study is to explore into the complexities of Walmart's Chinese venture. China poses a huge challenge for Walmart as there exist cross cultural diversities among the Chinese population.

Wal-marts competitive strategy needs to understand the Chinese market first and then think of a business model that can fit the country.

Thus the case aims to explore into the (1)

Competitive strategy of Walmart in China and

(2) Understand the adaptability of its business model to international environments.

Walmart’s unbeatable strategy The company employed more than 1.3 million associates (Wal-Mart’s term for employees) worldwide through more than 3,200 stores in the United States and more than 1,100 units in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany, and the United Kingdom. (The first international store opened in Mexico City in 1991.) In 2001, Fortune magazine named Wal-Mart the third most admired

company

in

America,

and

the

Financial

Times

and

PricewaterhouseCoopers ranked it as the eighth most admired company in the world. The following year, Wal-Mart was named number one on the Fortune 500 list and was presented with the Ron Brown Award for Corporate Leadership, a presidential award that recognized companies for outstanding achievement in employee and community relations.

Wal-Mart operates each store, from the products it stocks, to the front-end equipment that helps speed checkout, with the same philosophy: provide everyday low prices and superior customer service. Lower prices also eliminate the expense of frequent sales promotions and sales are more predictable. Wal-Mart has invested heavily in its unique cross-docking inventory system. Cross docking has enabled Wal-Mart to achieve economies of scale which reduce its costs of sales.

47

With this system, goods are continuously delivered to stores within 48 hours and often without having to inventory them. This allows Wal-Mart to replenish the shelves 4 times faster than its competition.

Wal-Mart's ability to replenish theirs shelves four times faster than its competition is just another advantage they have over competition. Wal-Mart leverages its buying power through purchasing in bulks and distributing the goods on it's own.

Wal-Mart guarantees everyday low prices and considers them the one stop shop.

Wal-Mart has taken their mind and cash over the last 20 years to become the world's largest retailer. Wal-Mart had a base of 2,200 stores in the 80's, closing out of the 90's with a bang of 3,600 stores and $4.4 billion in net income. Spurred

by NAFTA, Wal-Mart took advantage foreseeing potential growth in the foreign markets. Currently they have stories in the following countries: Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, United Kingdom, and in 1998 a controversial Germany. Most analysts believed Wal-Mart would move into eastern European countries however Wal-Mart confounded the analysts when they purchased a 21-unit Werkauf chain in Germany. Why Germany they ask?

The Germany countryside was littered with carcasses of other retailers, therefore Wal-Mart new that its non brand name items, service, and low prices would succeed. Analysts believed that Wal-Mart would not buy in Germany for many reasons: first, zoning laws, scarcity of land, and high real estate prices make it almost impossible to find affordable space for new supercenters, second, the domination of other major retail stores. Next, due to German unions, the workers are very highly paid and unemployment being high. Last, Wal-Mart low price strategy could be\ hindered due to other manufacturers' marketing strategies of selling brand name goods. Of course, Wal-Mart has succeeded in Germany with a "smile"I as always advertised. Wal-Mart pushes the limit of hours being opened despite the government regulated operating times. Wal-Mart has also renovated many German stores, restocking them with common shopping practices, wider aisles, and renaming the stores Wal-Mart. Most importantly in a land of pfenning pinchers, Wal-Mart has introduced EDLP ("Every Day Low Prices"I). The new 48

low prices have caused many competitors to lower their prices, in turn reducing income.

After the completion of the move to Germany, analysts now started predicting Wal-Mart's next threat to retailers was going to happen. Wal-Mart landed in Europe, causing many retailers to merge in order to survive. One of Wal-Mart's main competitors was Franklin, which is currently struggling at this time. Many of the Australian retailers such as Aldi, Tesco, and Ahold, who previously relied on specials, would be forced to reduce their daily prices to compete with Wal-Mart's everyday low price strategy. Low-Prices are the foundation of Wal-Mart's ideas and strategy and could surely beat out Australia's smaller end retailers. Another are in which Wal-Mart would prosper is with tourists,. Wal-Mart is well known and trusted, and in high tourism cities such as Sydney, travellers would be more likely to shop at a place they know and trust. Its inevitable that while on vacation for example, people forget to pack or run out of necessities such as toothpaste, shampoo, and deodorant, etc. Why not go to Wal-Mart and get all these things and pick up the few extra goodies you didn't realize you needed. Wal-Mart’s global strategy? What tactics has it used to become a major global retailer? Wal-Mart's success is mainly based on its concentration of a single-business strategy.

This strategy has achieved enviable success over the last three decades without relying upon diversification to sustain its growth and competitive advantages. In a sense, Wal-Mart’s low prices, service, and smile are their leading marketing strategies. However, there is risk in this strategy, because concentration on a single-business strategy is similar to "putting all of a firm's eggs in one industry basket". On the business side, Wal-Mart is the country’s most sophisticated retailer in terms of using information systems. Their cross-docking inventory and transportation services able them to have the goods needed by the consumer at all times.

In order for Wal-Mart to become a major global retailer, they have closely examined and utilized tactics to profit from their many stores. One great tactic is starting free-trade-zone distribution centers, in turn, saving almost $500,000 annually. Another tactic includes their service from when you walk in the store to 49

when you leave. Also, their bread and butter is again the technology they utilize.

They can track how much of one item has been sold on any giving day, and if not a hot commodity at one store, they will ship it out to another where it is being sold much faster.

Can Wal-Mart sustain its competitive advantage in global retailing?

Domestically, Wal-Mart is growing through its Superstores. Traditionally, this business is a very low-margin space, but with Wal-Mart's competitive advantages in distribution and leverage over suppliers, they can make it a big winner.

International expansion has been robust and will continue to be an important part of Wal-Mart's future growth opportunities. Certainly the Internet provides a growth avenue as well that will open a new faucet for them to potentially take over an upcoming market. Importance of selling only brand-name merchandise to the Wal-Mart strategy. The focus that Wal-Mart shares in all advertisements is service, low prices, and quality of goods. Wal-Mart is not a specialty shop focusing on one “good�, they are innovative offering a selection based on consumers overall needs. They do have some brand name merchandise however do not have a specific section set aside for Polo Shirts. Unlike Wal-Mart, brand name stores in most circumstances, only offer their product at a price that is normally above affordable. These retailers rely on their name to sell; Wal-Mart relies on their convenience and low prices.

Choosing markets to enter is of major importance in global expansion.

Although Wal-Mart, the world's largest company by revenue, was into its ninth year of operations in China, its stores were still losing money. It created a miracle in the US retail industry by revolutionising the sector's business model and successfully implementing its model through innovative practices that enabled it to sell national brands at "Every Day Low Prices". The challenge Wal-Mart faced was whether it could transport its successful model to win a market with many differing characteristics which threatened its low cost structure and which could nullify its competitive advantage. This is a management strategy case primarily concerned with the application of established domestic business models in

50

international expansion. It also sheds light on other globalisation issues such as market entry strategy, localisation vs. standardisation, the effect of regulation changes on the competitive landscape and firm performance.

Competitive advantage lies in systems efficiencies and primarily the efficient Supply Chain ,Wal-Mart owes much of its past success and expectations for future growth to an ability to self-distribute merchandise from a vast network of modern distribution centers served by a private truck fleet.

It is a capability that has enabled Wal-Mart to restrict inventory growth, while maintaining a strong in-stock position and filling the shelves of hundreds of new stores each year. For example, Wal-Mart's sales during the past two years increased 32% from $165 billion to $217.8 billion, but the value of its inventory at replacement cost increased by just 12.8% during the same time frame. The trend of leveraging an efficient supply chain to restrict inventory growth continued during the first quarter as sales increased 14% to $55 billion, but inventories only increased 3%. Much of the success has to do with Wal-Mart's ability to invest in new distribution capacity, especially as it relates to food, an area responsible for much of the company's growth. Wal-Mart's first food distribution center in Clarksville, Ark., is less than 10 years old and 12 of the 21 food distribution centers in operation today were opened during the past two years. Four more food distribution centers are slated to open during June and July.

The feat of restricting inventory growth, while simultaneously opening new stores and staying in stock has a lot to do with distribution centers and a private truck fleet, but equally important is the company's knowledge management system known as Retail Link. In existence for more than a decade, Wal-Mart has made consistent upgrades to the system that now provides suppliers with up to two years of sales history to analyze their business and spot new opportunities. While Retail Link is a powerful tool, one of the challenges Wal-Mart has faced is convincing suppliers to take full advantage of the opportunities it believes can be extracted from a thorough mining of the data.

51

Toward that end, a key emphasis has been to simplify the system to promote greater involvement of senior-level supplier executives with the ability to identify and execute untapped opportunities. Wal-Mart last year produced a brief video featuring many of its top executives reemphasizing the importance of Retail Link to the success of Wal-Mart and its suppliers.

"Early on, far too many companies designated somebody at a low rank to be responsible for the coordination of retail link and we both missed far too many opportunities," Tom Goughlin, president and CEO of the Wal-Mart Stores Division, said at the beginning of the talk, According to Coughlin, it is "extremely important" to have people of a high enough rank within a supplier's organization devoted to Retail Link so as to have an impact. Because senior executives may be less technologically savvy than analysts who require special training to use Retail Link, Wal-Mart introduced a new tool for making quick, fact-based decisions called Business-at-a-Glance. "It is really is a tool for business leaders to use," according to Doug McMillon, senior VP and GM. And since Wal-Mart uses Retail Link to analyze suppliers' performance, McMillon added, I would encourage to use Business-at-a Glance to beat us to the punch to know how you are doing."

Charles Holley, CFO of Wal-Mart's International Division, sums up the Retail Link system as a tool that "lets suppliers leverage Wal-Mart's technology to improve their business and also to satisfy both of our customers."

In addition to promoting usage of Retail Link at a senior level within supplier organizations, Walmart also solicits input from suppliers on how to improve the system. Wal-Mart sponsored Retail Link User Groups to meet regularly around the country where participating suppliers can share tips and strategies for increasing the effectiveness of the system. Wal-Mart also has a Retail Link steering committee comprised of members of the supplier community that meets quarterly and is able to share suggestions on how to improve the functionality of the system.� It is up to me and my team to continue to simplify and make Retail Link better and faster to continue to drive the business results," said David Porter, director of information systems.

52

There are many ways to compete, yet most companies tend to focus their strategies on only a few of the many ways to gain a competitive advantage. This limits their ability to create and sustain true competitive advantages. In order to have a lasting competitive advantage, it is important to develop a competitive strategy that includes a wide spectrum of techniques to gain advantage. One can compete on price, but can also compete on time, reputation, values, technology, image, experience, service, design, innovation, quality, information, knowledge, consultative value, loyalty, and process.

Price-Based The most popular technique is to focus on price. Having the lowest price has always provided a great advantage, but having the lowest price also means low margins, which means one needs a high volume to make it a profitable strategy. It is interesting, and somewhat amusing, to see the large number of competitors selling the same thing, all claiming to have the lowest price, yet none of them charge the same price. Obviously, someone is lying. The Internet makes pricebased competition even more difficult because it is so easy to compare prices and find the true lowest price.

When we think of price-based competition, we cant skip JetBlue Airlines, Dell Computers, Amazon.com, or we can think of anything made in China. Yet, if we look closer,we can see that companies that are great at price-based competition are using more than one competitive strategy. Wal-Mart competes on price, but they also compete on time and convenience because they offer so many products customers don’t have to drive to multiple stores to get what they need. They also compete on location and reputation.

As a nation, it’s hard to compete with China on price and win. China is best known for its low-cost manufacturing, thanks to low wages; however, its manufacturers are starting to focus on quality as a means of increasing their competitive advantage. The best never focus their competitive strategy on price

53

alone. They combine multiple competitive strategies to create a lasting advantage and continue to innovate as they use technology to raise the bar with each method.

Challenges in China’s retail market It currently seems that the opportunities envisioned by looking at China’s high growth market, uprising middle class and still unexplored markets are being undermined by the serious challenges this market entails. Following is a brief description of some of those challenges.

Diverse population – the Chinese people experience some huge differences in income, depending on their employment and social status, province they live in, and whether they’re from an urban or a rural place. Some of the population is very poor and perhaps have different purchasing habits that pose new if not impossible challenges for retailers.

Too many players – the China retail market is now exploding. Foreign companies in the market enjoy relatively strong liquidity and international backing while local companies have an advantage in their in-depth knowledge of the local market, being very quick to adapt and establish wide spread and cheap distribution systems.

Local protectionism - Local governments are always following directions given by central government. There seems to be a strong local bias against foreign companies and for local and state-owned companies. State regulations against it are rarely enforced.

Backward infrastructure - infrastructure is lacking and costly – roads are still not up to modern standards and are usually toll-based, distribution from port to

54

destination by rail extremely slow and often require overnight storages. IT communications still far behind in most areas on both speed and connectivity.

Regulatory restrictions and bureaucracy– at the beginning - confining growth to 3 stored per city, and only a few cities in southern China. Government had to approve each branch. Walmart abided to regulations while competitors bended those.

Employees – relatively unsatisfied, high turnover, low pay could not be compensated by stocks, China’s mandatory labour union relatively more hostile towards foreign brands, especially Walmart.

China’s entry to the WTO China’s entry to the WTO removed most of the restrictions that retailers were facing regarding the number, location and size of branches, eliminating barriers for foreign competitors to compete in China - atleast officially. Those restrictions were among the key reasons for Walmart’s lagging build up of their China branches and distribution channels that made it difficult for them to effectively compete using their original competitive advantages from the US.

Wal-Mart's winning strategy in the U.S. Walmart’s US strategy is based on selling branded products at low cost, which enables the lower class and middle class consumers to shop for products and save.

Due to the advances in technology over the years Wal-Mart has been able to achieve tremendous success. Wal-Mart's success has allowed the company to expand out of the United States. About 100 million customers visit a Wal-Mart store somewhere in the world. Wal-Mart's marketing strategy was to guarantee "everyday low prices" as a way to pull in customers. Traditional retailers relied on advertised "sales." The company employed more than 1.3 million associates worldwide through more than 3,200 stores in the United States.

55

Wal-Mart was named number one on the Fortune 500 list and was presented with the Ron Brown Award for Corporate Leadership, a presidential award that recognized companies for outstanding achievement in employer and community relations. Wal-Mart enjoyed a 50 percent market share position in the discount retail industry. Procter & Gamble, Clorox, and Johnson & Johnson were among its nearly 3,000 suppliers. Though Wal-Mart may have been the top customer for consumer product manufacturers, it deliberately ensured it did not become too dependent on any one suppler; no single vendor constituted more than 4 percent of its overall purchase volume. Further, Wal-Mart had persuaded its suppliers to have electronic "hook-ups" with its stores. About 85 percent of all the merchandise sold by Wal-Mart was shipped through its distribution system to its stores. Wal-Mart used a "saturation" strategy for store expansion. The standard was to be able to Doing business in China, is a different challenge altogether due to the popular Chinese culture, things have not been easy for Walmart in China.

Some things just don’t seem to work in China as well as they did in the US. Actually, China isn’t the first location Walmart’s been facing difficulties at, with the pullouts from Germany and South-Korea.

Wal-Mart business model in China Walmart has been through a lot in China and many of the lessons learned are perhaps easier to think about in retrospect, but it looks as if making the key-decisions about the China entry in real-time and under an extreme situation of uncertainty is a much more complicated task. Now, even though China has been opening to the WTO, there is still much that’s unknown about the retailing future in China and with the financial crisis emanating from Walmart’s home market the right path for Walmart is a tough call. Looking back, it seem that there are some major differences between Walmart and Carrefour’s strategy that contributed to Carrefour doing better in comparison to Walmart.

The main difference seems to be around the issue of adjusting to local culture.

While Carrefour was mainly trying to localize and do things “the Chinese way” by encouraging local branch decision making, building local supplier contracts, stretching local rules and regulations, and using local promotion marketing schemes, Walmart was more focused on doing things the American way – the way that made Walmart was it is today in the American market. This contributed to the 56

fact that Walmart has been struggling throughout many of the difficulties described above with the local customer, government and suppliers. China is considerably different than the states and yet Walmart has been slow to try to adjust to that, which just might cost Walmart the entire Chinese market (as it has in Germany and South Korea).

Suggestions Walmart needs to adjust to the Chinese market, while leveraging its source of competitive advantage. This requires a delicate balance. At the US, the brand Walmart is associated with low price rather than quality. In China, where everyone is going for low prices and providing low quality to do so, Walmart’s own brand could be an assurance for low prices but with quality by making the Walmart name about more than just retailing. The suggested strategy in the 2008 Walmart supplier meetings shows that it’s heading in that direction (Business Week). This also follows Gome’s strategy of renaming its suppliers to their own brand (Business Week), but goes beyond it as the foreign brand in China is already associated with higher reliability and quality assurance.

This actually holds true in China were retailers do a better job of enforcing supplier quality than the local regulations. With that, Walmart is still able to use its expertise and knowledge in supplier negotiation and distribution system to keep costs down.

Although Walmart is a Joint-Venture, the sources do not mention any attempt to leverage the local partner to meet the local market, which seems the opposite to some other joint ventures discussed like Danone and Wahaha. Working together with the local partner to understand where and how the local regulations can be used or adjusted for Walmart’s success and gaining a stronger hold of the potential customer’s heart might help Walmart’s growth and dominance in the Chinese market (The Economist).

57

Chinese lifestyle trends Chinese consumer habits needed to be kept in mind as the Chinese consumers go shopping to get out of the house, not necessarily to shop.

They’re more impulse driven and like on-site promotions. They’re brand conscious but not loyal. They’re frequent shopper of small amounts and especially appreciate freshness (alive) due to limited space at home (The McKinsey Quarterly). This seems a bit off the original Walmart strategy and so Walmarts needs to go deeper in trying to understand who the consumers are and what they’re looking for (“How to Market to Asia’s Masses”). Following those characteristics it might be more relevant to focus on the shopping experience and salesperson fleet using aggressive promotion methods. A bigger number of smaller shops with a more of wet-market feeling might be more to the local taste than the American style shops. (CCRRCA) Last, the strong centralization that has helped the American Walmart seems to hold back Walmart in China. China is less homogeneous than America and that calls for decentralization, giving more power to local managers and their suppliernetwork or perhaps even moving to franchising in some of the more remote locations (“Bringing best practice to China”, The McKinsey Quarterly).

Walmart will try to replicate its success in India just as it did in China. Indian market offers huge potential for organized retails. The giants like Walmart can make best use of their huge infrastructure and diverse experience in different countries to make India a success story and to grow further.

Walmart has already started understanding Indian market and identifying growth prospects. At first glance, the vegetable patches in this north Indian village look no different from the many small, spare farms that dot the country. But up close, visitors can see some curious experiments: insect traps made with reusable plastic bags; bamboo poles helping bitter gourd grow bigger and straighter; and seedlings germinating from plastic trays under a fine net.

These are low-tech innovations, to be sure. But they are crucial to the goals of the benefactor - Wal-Mart - that supplied them.

58

Two years after Wal-Mart came to India, it is trying to do to agriculture here what it has done to industries around the world: change business models by using its hyper-efficient practices to improve productivity and speed the flow of goods.

Not everyone is happy about the company's presence here. Many Indian activists and policy makers abhor big-box retailing, fearing that it will drive India's millions of shopkeepers out of business. Some legislators are suspicious of the company's motives. The government still does not allow Wal-Mart and other foreign companies to sell directly to consumers.

But Wal-Mart is persisting because its effort in India is critical to its global growth strategy. Confronted with saturated markets in the United States and other developed countries, the company needs to establish a bigger presence in emerging markets, like India, where modern stores make up just 5 percent of the country's retail industry.

Establishing good relations with farmers is a center-piece of the company's plans.

Though Wal-Mart is pushing many of its traditional products in India, like clothes, electronics and home goods, perhaps none is as essential as food. Wal-Mart needs high-quality produce at low prices to attract customers in volume.

The challenges are significant. Buying and transporting vegetables and fruits are difficult tasks because India has millions of small-scale farmers and an agriculture system riddled with middlemen.

Here in Haider Nagar, in India's bread basket state of Punjab, farmers who supply vegetables to Wal-Mart say they like working with the company. It typically pays them 5 percent to 7 percent more than they earn from local wholesale markets, they said. And they don't have to spend money transporting produce because WalMart picks it up from their fields.

Abdul Majid, who sells cucumbers to Wal-Mart, says his yields have risen about 25 percent since he started following farming advice about when to apply

59

fertilizers and which kinds - more zinc, less potash - from the company and its partner, Bayer CropScience.

Mohammad Haneef, a farmer in a nearby village, said he had sold to two other companies before Wal-Mart came to town, but one shut down and the other cheated him and paid him late. Wal-Mart is much better, he said, but its buyers are picky, taking the best vegetables and leaving him with the inferior ones that he still has to truck to wholesale markets.

"You have to establish trust," he said in Hindi. "Wal-Mart has been paying on time. We would just like them to buy more."

For Wal-Mart, establishing an agricultural beachhead in India will not be easy.

Many Indian companies have abandoned or significantly scaled back efforts to run supermarkets. Some companies grew too quickly and flamed out. But many others were undone by the numerous Gordian knots that hold back Indian agriculture: laws limit who can buy farmers' crops; 35 percent of fruits and vegetables are wasted because of inefficient transportation; and farmers earn too little to invest in their marginal farms.

"Anybody who says they can revolutionize retail in this country in a short period of time" is overestimating their abilities said R. Gopalakrishnan, executive director of the Tata Group and chairman of Rallis India, a company that makes fertilizers, seeds and pesticides.

Wal-Mart is also limited by New Delhi's ban on foreign-owned retail chains that prevent it from selling directly to Indian consumers.

"Not having access to our own retail stores through our own investments is a serious impediment," said Raj Jain, who heads Wal-Mart's Indian operation. "How do you pay for that big back end if you are not going to have access to the front end?"

60

Right now Wal-Mart operates in India through a 50-50 joint venture with Bharti Enterprises, an Indian conglomerate that also owns the country's largest cell phone company. Their partnership, known as Bharti Wal-Mart, supplies retail stores that are fully owned by Bharti and runs a wholesale store that sells to shopkeepers, hotels and other businesses.

Wal-Mart officials wouldn't say how much money the company has invested in India, but its operation here is at the forefront of a second big push into emerging markets. In the 1990s, Wal-Mart set up shop in China, Mexico and Brazil and now has hundreds of stores there. By comparison, Bharti Wal-Mart has just one wholesale store and will soon open two more. It employs 800 people in India, and hopes to have 5,000 in three years.

In recent speeches senior Indian leaders have suggested that they would like to remove restrictions on the retail industry to help reduce food prices, which were up 20 percent in January compared with a year earlier. Last month, Prime Minister Manmohan Singh cited the need "to take a firm view on opening up the retail trade."

But even as senior leaders speak of more openness, regulators recently published a rule that would restrict wholesale companies like Bharti Wal-Mart from earning more than 25 percent of their revenue from sales to affiliated "group companies" a term that is not clearly defined in the rules. A spokeswoman from Bharti WalMart, Arti Singh, said the company was trying to find out what this meant.

Last year, a committee in the Indian parliament said the government should not allow any more wholesale stores because companies like Wal-Mart were using them as "camouflage for doing retail through back door." The legislators also asserted that foreign companies would raise their initial low prices after they had driven small retailers out of business.

Wal-Mart has not waited for Indian policy makers to effect changes. It has spent the last two years building relationships with farmers and suppliers, and setting up its supply system. It is building a big distribution center outside New Delhi to supply Bharti stores, which are branded Easy Day, in and around the capital.

61

Wal-Mart also has learned to adapt its operations to numerous challenges. For instance, because trucks move slowly on the country's congested roads, WalMart's fruit and vegetable distribution center near Haider Nagar supplies retail stores only within 200 kilometers (124 miles) to keep produce fresh. By comparison, similar Wal-Mart facilities in China supply stores as far away as 400 kilometers.

But that means the company will have to set up more distribution centers with expensive power generators, making it more difficult to make money in India.

Still, Jain, who previously worked for Whirlpool and Unilever, was optimistic. He said the company would add more farmers and stores in Punjab and neighbouring Haryana state, then begin expanding further.

This is "a controlled experiment," he said. "It will take some time to make it sustainable and economically viable. Then once that happens, we need to take it to some other geographies and prove the model."

62

OPERATIONAL DIVISIONS

WAL-MART STORES U.S. Wal-Mart Stores U.S. is Wal-Mart's largest division, accounting for 67.2% of net sales for financial year 2006. It consists of three retail formats that have become commonplace in the United States: Discount Stores, Supercenters, and Neighborhood Markets. The retail department stores sell a variety of mostly non-grocery products, though emphasis has now shifted towards supercenters, which include more grocery items. This division also includes Wal-Mart's online retailer, walmart.com.

In September 2006, Wal-Mart announced a new pilot program to sell generic drugs at just $4 per prescription. The pilot program was launched at stores in the Tampa, Florida area, and expanded to all stores in Florida by January 2007. While the average price of generics is $29 per prescription, compared to $102 for name-brand drugs, Wal-Mart maintains that it is not selling at a loss, or providing as an act of charity – instead, they are using the same mechanisms of mass distribution that it uses to bring lower prices to other products. While it's little known outside of the drug industry, many of Walmart’s low cost generics are imported from India and made by drug makers there like Ranbaxy and CIPLA. On February 6, 2007, the company launched a "beta" version of its new movie download service, mediadownloads.walmart.com, which sells 3,000 films and television episodes from all major studios and television networks. This service was discontinued on December 21, 2007

63

WALMART DISCOUNT STORES Walmart founder, Sam Walton, opened his first Walmart discount store in 1962.

Today, there are 804 stores offering a pleasant and convenient shopping experience across the United States. The size of an average store is 108,000 square feet. Each store employs about 225 associates.

Walmart stores feature wide, clean, brightly-lit aisles and shelves stocked with a variety of quality, value-priced general merchandise, including: •

Family apparel

•

Healthy and beauty aids

•

Electronics

•

Toys

•

Lawn and garden items

•

Jewelry

•

Automotive products

•

Home furnishings

•

Hardware

•

Sporting goods

•

Pet supplies

•

Housewares

WALMART SUPERCENTERS Walmart’s Super-centers were developed in 1988 to meet the growing demand for convenient, one-stop family shopping featuring our famous Every Day Low Prices. We save you time and money by combining a full grocery and our general merchandise under one roof.

There are 2,767 Supercenters nationwide, and most are open 24 hours.

Supercenters average 185,000 square feet and employ about 350 or more associates.

Supercenter groceries feature:

64

•

Bakery goods

•

Meat and dairy products

•

Fresh produce

•

Dry goods and staples

•

Beverages

•

Deli foods

•

Frozen foods

•

Canned and packaged goods

•

Condiments and spices

•

Household supplies

Most Supercenters also have many specialty shops such as: •

Vision center

•

Tire & Lube Express

•

Brand-name restaurants

•

Portrait studio and one-hour photo center

•

Pharmacy

•

Health clinic

•

Employment Agency

•

Hair salon

•

Bank

WALMART NEIGHBOURHOOD MARKETS Neighbourhood Market by Walmart, is a chain of grocery stores launched by WalMart in 1998. These stores are designed to be the opposite of vastly larger superstores. These smaller stores are meant to "woo shoppers with easier parking, less crowded aisles and quicker checkout." Neighbourhood Market stores offer a variety of products including a full line of groceries.

Introduced in 1998 as Walmart Neighbourhood Market, Neighbourhood Markets range around 40,000 square feet (3,700 m2), which is a quarter of the size of a typical Wal-Mart Supercenter in the United States. However, in many

65

countries, stores of this scale would be classified as superstores or "compact hypermarkets". Neighbourhood Markets employ 80-100 employees and offer about 28,000 items.

United States The Neighbourhood Market chain has expanded into many smaller Southern markets in the United States as of 2008. Some of these stores are located relatively close to existing Walmart Supercenter stores; such examples include Center Point, Alabama; Mandeville, Louisiana; Homewood, Alabama; Sherwood, Arkansas; Fayetteville, Arkansas; Southaven/Horn Lake, Mississippi; Kenner, Louisiana; Plano, Texas and Norfolk, Virginia. Aggressive expansion of this division is planned in the next five years.

In July 2004, Wal-Mart acquired Amigo Supermarkets in Puerto Rico. They are very similar to Neighbourhood Markets, but the name remains Amigo. The employees use Wal-Mart ID tags to identify themselves.

Canada In 2005, the concept rolled into Canada. Wal-Mart opened three stores in 2006 (one in London, Ontario, and two in the Greater Toronto area), but the number could increase in the future. In Canada, Neighbourhood Markets are connected to regular Walmarts to form Wal-Mart Supercentres. There are now over 30 Supercentres in Canada with plans for over 100.

Neighbourhood Markets offer a quick and convenient shopping experience for customers who need groceries, pharmaceuticals, and general merchandise all at our famous Every Day Low Prices.

First opened in 1998, there are now 182 Neighbourhood Markets, each employing about 95 associates. A typical store is about 42,000 square feet.

Neighbourhood Markets feature a wide variety of products, including: •

Fresh produce

•

Meat and Dairy products

66

•

Frozen foods

•

Dry goods and staples

•

Health and beauty aids

•

Stationary and paper goods

•

Drive-through pharmacy

•

Deli foods

•

Bakery items

•

Canned and packaged goods

•

Condiments and spices

•

Pet supplies

•

Household supplies

•

One-hour photo center

PRIVATE LABEL BRANDS A weaker opponent can put up a good fight in a tug-of-war, but once the rope slips, recovery becomes a long shot.

Such is the position of some brand-name food companies trying to hold their ground against generic competitors. Private-label sales accounted for 13.4% of a basket of U.S. groceries in 1994, but likely reached a new high of 17.5% in 2009, fuelled by tougher times, says Robert Moskow of Credit Suisse.

The key question is whether Americans will stick with generics if the economy improves. In some consumer-product categories such as razor blades, differences in quality are noticeable. A better shave is probably worth paying for again as soon as it becomes affordable.

But for many commodity-like products, second-best has proven good enough.

Private-label products account for 26.2% of ketchup and condiment consumption in U.S. households, up 4.2 percentage points from 1994, according to Consumer Edge Research. The firm found that 63.3% of shoppers were "very satisfied" with generic condiments, nearly the highest rate of all categories surveyed.

67

Spices could be in the same boat. Like ketchup, spices can be hard to distinguish from premium alternatives, apart from packaging. Spice manufacturer McCormick saw private label's share of its markets rise to 14.5% in 2009 from 13.5% in 2008, Mr. Moskow says.

The shift appears have jolted even brand-focused Wal-Mart into action. The retail giant has scrambled to accommodate consumer tastes by offering more generic foods in recent years. McCormick generates 11% of its revenue from sales to WalMart, mainly by selling brand-name spices. But Wal-Mart has considered switching to private-label spices, testing the idea by replacing McCormick products with generics in some stores.

True, McCormick's sales at Wal-Mart may not be wiped out altogether if such a switch gathered pace. The company also produces private-label spices that could replace some of its brand-name products on Wal-Mart's shelves.

Even so, McCormick's margins could take a big hit. The company's generic spices sell for 30% to 40% less than its regular products. On the cost side, materials and packaging expenses are probably only slightly lower for private-label spices. And the company could hardly risk cutting its advertising budget.

Worse, McCormick's trouble may not end with Wal-Mart. A look outside to Europe, where private-label brands make up a far higher proportion of food sales, suggests the U.S. trend may have further to go across the grocery sector. Kroger,

68

for instance, already generates about a quarter of its sales from private label and has discussed raising the percentage, according to Barclays Capital's Meredith Adler. Such products account for more than half of sales at some European grocers.

McCormick trades at 14.1 times this year's consensus earnings, slightly above the average packaged-food company. With its brand-name business in danger, it's probably time for investors to clear the shelves.

Bharti-Walmart has already introduced eight of Wal-Mart’s private labels in India, which it sells at the company’s sole wholesale retail outlet in Amritsar and at about six dozen Easy Day stores owned by Bharti Retail Ltd, which directly cater to retail customers Several global companies from whom Wal-Mart Stores Inc., the world’s biggest retailer, sources consumer goods for its private labels business are seeking an entry into India to profit from the growing importance of organized retailing in one of the world’s fastest growing economies.

“We have a lot of international private label suppliers who are interested in setting up shop in India to create private labels, not just for Bharti Retail and BhartiWalmart stores, but for the entire industry. We are working on those suppliers to come to India,” a spokesperson for Bharti-Walmart Pvt. Ltd told Mint in an email interview.

Bharti-Walmart is a 50:50 joint venture between the US retailing powerhouse and Bharti Enterprises Ltd. The spokesperson declined to name the companies interested in coming to India or the kind of opportunities they were exploring.

Bharti-Walmart has already introduced eight of Wal-Mart’s private labels in India, which it sells at the company’s sole wholesale retail outlet in Amritsar and at about six dozen Easy Day stores owned by Bharti Retail Ltd, which directly cater to retail customers. The private labels on offer in India include the popular Great

69

Value brand, which offers tea, local snacks, ketchup, dish-washing bars, and toilet and glass cleaners.

Private labels are brands owned by large retailers that can be sold at lower prices without harming profit margins because they do not entail large marketing and advertising costs. Most large retailers in India such as Pantaloon Retail (India) Ltd, Aditya Birla Retail Ltd, Spencer’s Retail Ltd and Reliance Retail Ltd are pushing private labels to capture a larger share of consumer spending in their stores.

Smart sourcing is one of the key factors in retailing success—and Wal-Mart is widely regarded to have one of the best-oiled supply chains in the world, with 61,000 suppliers in 50 countries, including India.

The suppliers to the world’s largest retailer by sales aren’t small either. For instance, its cereal and snacks private label supplier Ralcorp Holding Inc. has an annual revenue of around $3.9 billion (around Rs17,980 crore). New York Stock Exchange-listed Cott Corp., which supplies private label beverages to Wal-Mart and other retailers, including Britain’s Tesco Plc. and Germany’s Metro AG, has annual revenue of $1.7 billion.

Other global suppliers to Wal-Mart include billion-dollar companies such as baby food maker PBM Products Llc, and pickles and soup supplier TreeHouse Foods Inc. “As a global sourcing organization, we are always looking for emerging opportunities to get the best products for our customers, on an ongoing basis,” the spokesperson said.

India allows fully owned foreign subsidiaries in most of the manufacturing businesses unless they operate in sectors reserved for small-scale industries, such as pickles, mustard oil, wax candles and safety matches, among others.

“It’s natural for these companies to come here and it’s natural for Wal-Mart to bring people it is already familiar with and who understand its needs,” said Jayant

70

Kochar, managing director of New Delhi-based retail consultancy firm Go Fish Retail Solutions.

Kochar said the arrival of such vendors would be good for the Indian economy as they would source most of their raw materials from within the country and generate employment.

“Indian market is huge and there is option for everyone. If good companies with proven expertise come in, they raise the bar and they improve standards,” he added.

Bharti-Walmart currently sources its private labels from 120 Indian companies.

Wal-Mart has been sourcing products from suppliers in India for at least 20 years for its global operations. Major categories sourced from Indian suppliers include home textiles (including towels, shower curtains, bath mats, accessories, bedding sheets, kitchen linens), apparel (including wovens, knitwear and leather footwear), fine jewellery, tableware and home decor products.

“We are also partnering SMEs (small and medium enterprises) in India to grow their businesses by upgrading their processes, developing new products and leveraging Wal-Mart’s global sourcing network,” the spokesperson said.

MARKETSIDE In October, Wal-Mart officially opened four Marketside stores in the Phoenix area. The stores cater to shoppers who are looking for ready-to-eat meals and fresh produce, and might not have time for a trip to a full-scale grocery store.

Opened in 2008, Marketside stores are small community pilot grocery stores specializing in fresh, delicious meals at great prices. In our stores, customers can shop for a variety of fresh ingredients, restaurant-quality prepared meals and their everyday favourite national brands - even freshly baked breads and a wide assortment of wines.

71

Walmart provides a fresh and convenient shopping experience for busy people who want an easy answer to the question, 'What's for dinner?'

Marketside’s offerings include: •

ENTRÉES AND SIDES inspired by classically trained chefs and ready to

serve in minutes.

•

An assortment of HOT FOODS like pizzas, roasted chickens, soups and

breads that are fresh out of our oven.

•

Daily deliveries of fresh produce, meats and flowers for GUARANTEED

FRESHNESS. •

More than 300 NATURAL AND ORGANIC products throughout the entire

store.

•

A vast assortment of wines, with over 200 under $10.*

•

Plus, all the GROCERY BRANDS you want at low, low prices!

SAM’S CLUB Sam's Club is a chain of warehouse clubs which sell groceries and general merchandise, often in large quantities. Sam's Club stores are "membership" stores and most customers buy annual memberships. However, non-members can make purchases either by buying a one-day membership or paying a surcharge based on the price of the purchase. Some locations also sell gasoline. The first Sam's Club opened in 1983 in Midwest City, Oklahoma under the name "Sam's Wholesale Club".

Sam's has found a niche market in recent years as a supplier to small businesses. All Sam's Club stores are open early hours exclusively for business members and their slogan is "We're in Business for Small Business." In March 2009, the company announced that it plans to enter the electronic medical records business by offering a software package to physicians in small practices for $25,000. Wal-Mart is partnering with Dell and eClinicalWorks.com in this new venture.

72

According to Wal-Mart's 2007 Annual Report, Sam's Club's sales during 2007 were $42 billion, or 12.1% of Wal-Mart's total 2007 sales. As of January 31, 2008, there were 591 Sam's Clubs in the United States.

WALMART.COM Founded in 2000, Walmart.com brings the convenience, great merchandise selection, friendly service and Every Day Low Prices of your neighborhood Walmart to the Internet.

Walmart.com features more than 1,000,000 products, plus easy-to-use music downloads and digital one-hour photo services. And, we’re adding more great products every day.

During the holidays, Walmart.com features many special offers available only online. It’s also a convenient place to find out about our exciting in-store holiday specials.

With its innovative “Site to Store” program, one can purchase items at Walmart.com and then have them shipped free to your local store for pickup.

73

WALMART’S STRATEGY TO UNDERSTAND INDIAN CONSUMERS Walmart’s entry into the Indian market is not going to be easy because of the diverse nature of buyers in India. India is called a land of diverse cultures which is divided into 35 states and union territories. These states further consist of different cities and villages and the intensity of diversity goes on increasing as we go into smaller segments. Making successful entry in such a market is not a child’s play even for world’s largest retailer. Walmart has tied up with India’s biggest telecom company Bharti, which of-course has a deep understanding of customer needs and expectations.

Walmart’s joint venture with Bharti will definitely help Walmart understand Indian customers in a better manner. It will not only increase Walmart’s reach into Indian market but will also generate more trust among Indian consumers.

Understanding of consumer behaviour of a countries consumer is very necessary for a company to make a successful entry and its survival in due course.

The study of consumers helps firms and organizations improve their marketing strategies by understanding issues such as how

74

•

The psychology of how consumers think, feel, reason, and select between different alternatives (e.g., brands, products);

•

The psychology of how the consumer is influenced by his or her environment (e.g., culture, family, signs, media);

•

The behaviour of consumers while shopping or making other marketing decisions;

•

Limitations in consumer knowledge or information processing abilities influence decisions and marketing outcome;

•

How consumer motivation and decision strategies differ between products that differ in their level of importance or interest that they entail for the consumer; and

•

How marketers can adapt and improve their marketing campaigns and marketing strategies to more effectively reach the consumer.

One "official" definition of consumer behavior is "The study of individuals, groups, or organizations and the processes they use to select, secure, use, and dispose of products, services, experiences, or ideas to satisfy needs and the impacts that these processes have on the consumer and society." Although it is not necessary to memorize this definition, it brings up some useful points: •

Behaviour occurs either for the individual, or in the context of a group (e.g., friend’s influence what kinds of clothes a person wears) or an organization (people on the job make decisions as to which products the firm should use).

•

Consumer behaviour involves the use and disposal of products as well as the study of how they are purchased. Product use is often of great interest to the marketer, because this may influence how a product is best positioned or how we can encourage increased consumption. Since many environmental problems result from product disposal (e.g., motor oil being sent into sewage systems to save the recycling fee, or garbage piling up at landfills) this is also an area of interest.

•

Consumer behaviour involves services and ideas as well as tangible products.

•

The impact of consumer behaviour on society is also of relevance. For example, aggressive marketing of high fat foods, or aggressive marketing of

75

easy credit, may have serious repercussions for the national health and economy.

There are four main applications of consumer behavior: •

The most obvious is for marketing strategy—i.e., for making better marketing campaigns. For example, by understanding that consumers are more receptive to food advertising when they are hungry, we learn to schedule snack advertisements late in the afternoon. By understanding that new products are usually initially adopted by a few consumers and only spread later, and then only gradually, to the rest of the population, we learn that (1) companies that introduce new products must be well financed so that they can stay afloat until their products become a commercial success and (2) it is important to please initial customers, since they will in turn influence many subsequent customers’ brand choices.

•

A second application is public policy. In the 1980s, Accutane, a near miracle cure for acne, was introduced. Unfortunately, Accutane resulted in severe birth defects if taken by pregnant women. Although physicians were instructed to warn their female patients of this, a number still became pregnant while taking the drug. To get consumers’ attention, the Federal Drug Administration (FDA) took the step of requiring that very graphic pictures of deformed babies be shown on the medicine containers.

•

Social marketing involves getting ideas across to consumers rather than selling something. Marty Fishbein, a marketing professor, went on sabbatical to work for the Centers for Disease Control trying to reduce the incidence of transmission of diseases through illegal drug use. The best solution, obviously, would be if we could get illegal drug users to stop. This, however, was deemed to be infeasible. It was also determined that the practice of sharing needles was too ingrained in the drug culture to be stopped. As a result, using knowledge of consumer attitudes, Dr. Fishbein created a campaign that encouraged the cleaning of needles in bleach before sharing them, a goal that was believed to be more realistic.

•

As a final benefit, studying consumer behaviour should make us better consumers. Common sense suggests, for example, that if you buy a 64 liquid

76

ounce bottle of laundry detergent, you should pay less per ounce than if you bought two 32 ounce bottles. In practice, however, you often pay a size premium by buying the larger quantity. In other words, in this case, knowing this fact will sensitize you to the need to check the unit cost labels to determine if you are really getting a bargain.

There are several units in the market that can be analyzed. Our main thrust in this course is the consumer. However, we will also need to analyze our own firm’s strengths and weaknesses and those of competing firms. Suppose, for example, that we make a product aimed at older consumers, a growing segment. A competing firm that targets babies, a shrinking market, is likely to consider repositioning toward our market. To assess a competing firm’s potential threat, we need to examine its assets (e.g., technology, patents, market knowledge, and awareness of its brands) against pressures it faces from the market. Finally, we need to assess conditions (the marketing environment). For example, although we may have developed a product that offers great appeal for consumers, a recession may cut demand dramatically.

Market research is often needed to ensure that we produce what customers really want and not what we think they want.

Primary v/s Secondary Research Methods There are two main approaches to marketing. Secondary research involves using information that others have already put together. For example, if you are thinking about starting a business making clothes for tall people, you don’t need to question people about how tall they are to find out how many tall people exist—that information has already been published by the U.S. Government. Primary research, in contrast, is research that you design and conduct yourself. For example, you may need to find out whether consumers would prefer that your soft drinks be sweater or tarter.

Research will often help us reduce risks associated with a new product, but it cannot take the risk away entirely. It is also important to ascertain whether the research has been complete. For example, Coca Cola did a great deal of research prior to releasing

77

the New Coke, and consumers seemed to prefer the taste. However, consumers were not prepared to have this drink replace traditional Coke.

Understanding of Consumer Behavior Walmart must develop an understanding of its customers in India. Various studies have been conducted in India which may help Walmart in understanding Indian consumer and customizes its products accordingly.

Surveys are useful for getting a great deal of specific information. Surveys can contain open-ended questions (e.g., “In which city and state were you born?) or closed-ended, where the respondent is asked to select answers from a brief list (e.g., “__Male ___ Female.”) Open ended questions have the advantage that the respondent is not limited to the options listed, and that the respondent is not being influenced by seeing a list of responses. However, open-ended questions are often skipped by respondents, and coding them can be quite a challenge. In general, for surveys to yield meaningful responses, sample sizes of over 100 are usually required because precision is essential. For example, if a market share of twenty percent would result in a loss while thirty percent would be profitable, a confidence interval of 20-35% is too wide to be useful.

Surveys come in several different forms. Mail surveys are relatively inexpensive, but response rates are typically quite low—typically from 5-20%. Phone-surveys get somewhat higher response rates, but not many questions can be asked because many answer options have to be repeated and few people are willing to stay on the phone for more than five minutes. Mall intercepts are a convenient way to reach consumers, but respondents may be reluctant to discuss anything sensitive face-to-face with an interviewer.

Surveys, as any kind of research, are vulnerable to bias. The wording of a question can influence the outcome a great deal. For example, more people answered no to the question “Should speeches against democracy be allowed?” than answered yes to “Should speeches against democracy be forbidden?” For face-to-face interviews, interviewer bias is a danger, too. Interviewer bias occurs when the interviewer influences the way the respondent answers.

For example, unconsciously an

78

interviewer that works for the firm manufacturing the product in question may smile a little when something good is being said about the product and frown a little when something negative is being said. The respondent may catch on and say something more positive than his or her real opinion. Finally, a response bias may occur—if only part of the sample responds to a survey, the respondents’ answers may not be representative of the population.

Focus groups are useful when the marketer wants to launch a new product or modify an existing one. A focus group usually involves having some 8-12 people come together in a room to discuss their consumption preferences and experiences. The group is usually led by a moderator, who will start out talking broadly about topics related broadly to the product without mentioning the product itself. For example, a focus group aimed at sugar-free cookies might first address consumers’ snacking preferences, only gradually moving toward the specific product of sugar-free cookies.

By not mentioning the product up front, we avoid biasing the participants into thinking only in terms of the specific product brought out. Thus, instead of having consumers think primarily in terms of what might be good or bad about the product, we can ask them to discuss more broadly the ultimate benefits they really seek. For example, instead of having consumers merely discuss what they think about some sugar-free cookies that we are considering releasing to the market, we can have consumers speak about their motivations for using snacks and what general kinds of benefits they seek. Such a discussion might reveal a concern about healthfulness and a desire for wholesome foods. Probing on the meaning of wholesomeness, consumers might indicate a desire to avoid artificial ingredients. This would be an important concern in the marketing of sugar-free cookies, but might not have come up if consumers were asked to comment directly on the product where the use of artificial ingredients is, by virtue of the nature of the product, necessary.

Focus groups are well suited for some purposes, but poorly suited for others. In general, focus groups are very good for getting breadth—i.e., finding out what kinds of issues are important for consumers in a given product category. Here, it is helpful that focus groups are completely “open-ended:” The consumer mentions his or her preferences and opinions, and the focus group moderator can ask the consumer to elaborate. In a questionnaire, if one did not think to ask about something, chances are

79

that few consumers would take the time to write out an elaborate answer. Focus groups also have some drawbacks, for example: •

They represent small sample sizes. Because of the cost of running focus groups, only a few groups can be run. Suppose you run four focus groups with ten members each. This will result in an n of 4(10)=40, which is too small to generalize from. Therefore, focus groups cannot give us a good idea of:

•

What proportion of the population is likely to buy the product.

•

What price consumers are willing to pay.

•

The groups are inherently social. This means that:

•

Consumers will often say things that may make them look good (i.e., they watch public television rather than soap operas or cook fresh meals for their families daily) even if that is not true.

•

Consumers may be reluctant to speak about embarrassing issues (e.g., weight control, birth control).

Personal interviews involve in-depth questioning of an individual about his or her interest in or experiences with a product. The benefit here is that we can get really into depth (when the respondent says something interesting, we can ask him or her to elaborate), but this method of research is costly and can be extremely vulnerable to interviewer bias.

To get a person to elaborate, it may help to try a common tool of psychologists and psychiatrists—simply repeating what the person said. He or she will often become uncomfortable with the silence that follows and will then tend to elaborate. This approach has the benefit that it minimizes the interference with the respondent’s own ideas and thoughts. He or she is not influenced by a new question but will, instead, go more in depth on what he or she was saying.

Personal interviews are highly susceptible to inadvertent “signaling” to the respondent. Although an interviewer is looking to get at the truth, he or she may have a significant interest in a positive consumer response. Unconsciously, then, he or she may inadvertently smile a little when something positive is said and frown a little when something negative is said. Consciously, this will often not be noticeable, and

80

the respondent often will not consciously be aware that he or she is being “reinforced” and “punished” for saying positive or negative things, but at an unconscious level, the cumulative effect of several facial expressions are likely to be felt. Although this type of conditioning will not get a completely negative respondent to say all positive things, it may “swing” the balance a bit so that respondents are more likely to say positive thoughts and withhold, or limit the duration of, negative thoughts.

Projective techniques are used when a consumer may feel embarrassed to admit to certain opinions, feelings, or preferences. For example, many older executives may not be comfortable admitting to being intimidated by computers. It has been found that in such cases, people will tend to respond more openly about “someone else.”

Thus, we may ask them to explain reasons why a friend has not yet bought a computer, or to tell a story about a person in a picture who is or is not using a product. The main problem with this method is that it is difficult to analyze responses.

Projective techniques are inherently inefficient to use. The elaborate context that has to be put into place takes time and energy away from the main question. There may also be real differences between the respondent and the third party. Saying or thinking about something that “hits too close to home” may also influence the respondent, who may or may not be able to see through the ruse.

Observation of consumers is often a powerful tool. Looking at how consumers select products may yield insights into how they make decisions and what they look for. For example, some American manufacturers were concerned about low sales of their products in Japan. Observing Japanese consumers, it was found that many of these Japanese consumers scrutinized packages looking for a name of a major manufacturer —the product specific-brands that are common in the U.S. (e.g., Tide) were not impressive to the Japanese, who wanted a name of a major firm like Mitsubishi or Proctor & Gamble. Observation may help us determine how much time consumers spend comparing prices, or whether nutritional labels are being consulted.

A question arises as to whether this type of “spying” inappropriately invades the privacy of consumers. Although there may be cause for some concern in that the particular individuals have not consented to be part of this research, it should be noted

81

that there is no particular interest in what the individual customer being watched does. The question is what consumers—either as an entire group or as segments— do. Consumers benefit, for example, from stores that are designed effectively to promote efficient shopping. If it is found that women are more uncomfortable than men about others standing too close, the areas of the store heavily trafficked by women can be designed accordingly. What is being reported here, then, are averages and tendencies in response. The intent is not to find “juicy” observations specific to one customer.

The video clip with Paco Underhill that we saw in class demonstrated the application of observation research to the retail setting. By understanding the phenomena such as the tendency toward a right turn, the location of merchandise can be observed. It is also possible to identify problem areas where customers may be overly vulnerable to the “but brush,” or overly close encounter with others. This method can be used to identify problems that the customer experiences, such as difficulty finding a product, a mirror, a changing room, or a store employee for help.

Online research methods. The Internet now reaches the great majority of households in the U.S., and thus, online research provides new opportunity and has increased in use.

One potential benefit of online surveys is the use of “conditional branching.” In conventional paper and pencil surveys, one question might ask if the respondent has shopped for a new car during the last eight months. If the respondent answers “no,” he or she will be asked to skip ahead several questions—e.g., going straight to question 17 instead of proceeding to number 9. If the respondent answered “yes,” he or she would be instructed to go to the next question which, along with the next several ones, would address issues related to this shopping experience. Conditional branching allows the computer to skip directly to the appropriate question. If a respondent is asked which brands he or she considered, it is also possible to customize brand comparison questions to those listed. Suppose, for example, that the respondent considered Ford, Toyota, and Hyundai, it would be possible to ask the subject questions about his or her view of the relative quality of each respective pair—in this case, Ford vs. Toyota, Ford vs. Hyundai, and Toyota vs. Hyundai.

82

There are certain drawbacks to online surveys. Some consumers may be more comfortable with online activities than others—and not all households will have access. Today, however, this type of response bias is probably not significantly greater than that associated with other types of research methods. A more serious problem is that it has consistently been found in online research that it is very difficult —if not impossible—to get respondents to carefully read instructions and other information online—there is a tendency to move quickly. This makes it difficult to perform research that depends on the respondent’s reading of a situation or product description.

Online search data and page visit logs provides valuable ground for analysis. It is possible to see how frequently various terms are used by those who use a firm’s web site search feature or to see the route taken by most consumers to get to the page with the information they ultimately want. If consumers use a certain term frequently that is not used by the firm in its product descriptions, the need to include this term in online content can be seen in search logs. If consumers take a long, “torturous” route to information frequently accessed, it may be appropriate to redesign the menu structure and/or insert hyperlinks in “intermediate” pages that are found in many users’ routes.

Scanner data. Many consumers are members of supermarket “clubs.” In return for signing p for a card and presenting this when making purchases, consumers are often eligible for considerable discounts on selected products.

Researchers use a more elaborate version of this type of program in some communities. Here, a number of consumers receive small payments and/or other incentives to sign up to be part of a research panel. They then receive a card that they are asked to present any time they go shopping. Nearly all retailers in the area usually cooperate. It is now possible to track what the consumer bought in all stores and to have a historical record.

The consumer’s shopping record is usually combined with demographic information (e.g., income, educational level of adults in the household, occupations of adults, ages of children, and whether the family owns and rents) and the family’s television watching habits. (Electronic equipment run by firms such as A. C. Nielsen will

83

actually recognize the face of each family member when he or she sits down to watch).

It is now possible to assess the relative impact of a number of factors on the consumer’s choice—e.g., •

What brand in a given product category was bought during the last, or a series of past, purchase occasions;

•

Whether, and if so, how many times a consumer has seen an ad for the brand in question or a competing one;

•

Whether the target brand (and/or a competing one) is on sale during the store visit;

•

Whether any brand had preferential display space;

•

The impact of income and/or family size on purchase patterns; and

•

Whether a coupon was used for the purchase and, if so, its value.

A “split cable” technology allows the researchers to randomly select half the panel members in a given community to receive one advertising treatment and the other half another. The selection is truly random since each household, as opposed to neighborhood, is selected to get one treatment or the other. Thus, observed differences should, allowing for sampling error, the be result of advertising exposure since there are no other systematic differences between groups.

Interestingly, it has been found that consumers tend to be more influenced by commercials that they “zap” through while channel surfing even if they only see part of the commercial. This most likely results from the reality that one must pay greater attention while channel surfing than when watching a commercial in order to determine which program is worth watching.

Scanner data is, at the present time, only available for certain grocery item product categories—e.g., food items, beverages, cleaning items, laundry detergent, paper towels, and toilet paper. It is not available for most non-grocery product items. Scanner data analysis is most useful for frequently purchased items (e.g., drinks, food items, snacks, and toilet paper) since a series of purchases in the same product category yield more information with greater precision than would a record of

84

one purchase at one point in time. Even if scanner data were available for electronic products such as printers, computers, and MP3 players, for example, these products would be purchased quite infrequently. A single purchase, then, would not be as effective in effectively distinguishing the effects of different factors—e.g., advertising, shelf space, pricing of the product and competitors, and availability of a coupon—since we have at most one purchase instance during a long period of time during which several of these factors would apply at the same time. In the case of items that are purchased frequently, the consumer has the opportunity to buy a product, buy a competing product, or buy nothing at all depending on the status of the brand of interest and competing brands. In the case of the purchase of an MP3 player, in contrast, there may be promotions associated with several brands going on at the same time, and each may advertise. It may also be that the purchase was motivated by the breakdown of an existing product or dissatisfaction or a desire to add more capabilities.

Physiological measures are occasionally used to examine consumer response. For example, advertisers may want to measure a consumer’s level of arousal during various parts of an advertisement. This can be used to assess possible discomfort on the negative side and level of attention on the positive side.

By attaching a tiny camera to plain eye glasses worn by the subject while watching an advertisement, it is possible to determine where on screen or other ad display the subject focuses at any one time. If the focus remains fixed throughout an ad sequence where the interesting and active part area changes, we can track whether the respondent is following the sequence intended. If he or she is not, he or she is likely either not to be paying as much attention as desired or to be confused by an overly complex sequence. In situations where the subject’s eyes do move, we can assess whether this movement is going in the intended direction.

Mind-reading would clearly not be ethical and is, at the present time, not possible in any event. However, it is possible to measure brain waves by attaching electrodes.

These readings will not reveal what the subject actually thinks, but it is possible to distinguish between beta waves—indicating active thought and analysis—and alpha waves, indicating lower levels of attention.

85

An important feature of physiological measures is that we can often track performance over time. A subject may, for example, be demonstrating good characteristics—such as appropriate level of arousal and eye movement—during some of the ad sequence and not during other parts. This, then, gives some guidance as to which parts of the ad are effective and which ones need to be reworked.

In a variation of direct physiological measures, a subject may be asked, at various points during an advertisement, to indicate his or her level of interest, liking, comfort, and approval by moving a lever or some instrument (much like one would adjust the volume on a radio or MP3 player). Republican strategist used this technique during the impeachment and trial of Bill Clinton in the late 1990s. By watching approval during various phases of a speech by the former President, it was found that viewers tended to respond negatively when he referred to “speaking truthfully” but favorably when the President referred to the issues in controversy as part of his “private life.”

The Republican researchers were able to separate average results from Democrats, Independents, and Republicans, effectively looking at different segments to make sure that differences between each did not cancel out effects of the different segments.

(For example, if at one point Democrats reacted positively and Republicans responded negatively with the same intensity, the average result of apparent indifference would have been very misleading).

Culture and Subculture Culture is part of the external influences that impact the consumer. That is, culture represents influences that are imposed on the consumer by other individuals.

The definition of culture offered in one textbook is “That complex whole which includes knowledge, belief, art, morals, custom, and any other capabilities and habits acquired by man person as a member of society.” From this definition, we make the following observations: •

Culture, as a “complex whole,” is a system of interdependent components.

•

Knowledge and beliefs are important parts. In the U.S., we know and believe that a person who is skilled and works hard will get ahead. In other countries, it may be believed that differences in outcome result more from luck.

86

“Chunking,” the name for China in Chinese, literally means “The Middle Kingdom.” The belief among ancient Chinese that they were in the center of the universe greatly influenced their thinking.

•

Other issues are relevant. Art, for example, may be reflected in the rather arbitrary practice of wearing ties in some countries and wearing turbans in others. Morality may be exhibited in the view in the United States that one should not be naked in public. In Japan, on the other hand, groups of men and women may take steam baths together without perceived as improper. On the other extreme, women in some Arab countries are not even allowed to reveal their faces. Notice, by the way, that what at least some countries view as moral may in fact be highly immoral by the standards of another country. For example, the law that once banned interracial marriages in South Africa was named the “Immorality Act,” even though in most civilized countries this law, and any degree of explicit racial prejudice, would itself be considered highly immoral.

Culture has several important characteristics: (1) Culture is comprehensive. This means that all parts must fit together in some logical fashion. For example, bowing and a strong desire to avoid the loss of face are unified in their manifestation of the importance of respect.

(2) Culture is learned rather than being something we are born with. We will consider the mechanics of learning later in the course.

(3) Culture is manifested within boundaries of acceptable behavior. For example, in American society, one cannot show up to class naked, but wearing anything from a suit and tie to shorts and a T-shirt would usually be acceptable. Failure to behave within the prescribed norms may lead to sanctions, ranging from being hauled off by the police for indecent exposure to being laughed at by others for wearing a suit at the beach.

(4) Conscious awareness of cultural standards is limited. One American spy was intercepted by the Germans during World War II simply because of the way he held his knife and fork while eating.

87

(5) Cultures fall somewhere on a continuum between static and dynamic depending on how quickly they accept change. For example, American culture has changed a great deal since the 1950s, while the culture of Saudi Arabia has changed much less.

Dealing with culture. Culture is a problematic issue for many marketers since it is inherently nebulous and often difficult to understand. One may violate the cultural norms of another country without being informed of this, and people from different cultures may feel uncomfortable in each other’s presence without knowing exactly why (for example, two speakers may unconsciously continue to attempt to adjust to reach an incompatible preferred interpersonal distance).

Warning about stereotyping. When observing a culture, one must be careful not to over-generalize about traits that one sees. Research in social psychology has suggested a strong tendency for people to perceive an “outgroup” as more homogenous than an “ingroup,” even when they knew what members had been assigned to each group purely by chance. When there is often a “grain of truth” to some of the perceived differences, the temptation to over-generalize is often strong.

Note that there are often significant individual differences within cultures.

Cultural lessons. We considered several cultural lessons in class; the important thing here is the big picture. For example, within the Muslim tradition, the dog is considered a “dirty” animal, so portraying it as “man’s best friend” in an advertisement is counter-productive. Packaging, seen as a reflection of the quality of the “real” product, is considerably more important in Asia than in the U.S., where there is a tendency to focus on the contents which “really count.” Many cultures observe significantly greater levels of formality than that typical in the U.S., and Japanese negotiator tend to observe long silent pauses as a speaker’s point is considered.

Cultural Characteristics as a Continuum. There is a tendency to stereotype cultures as being one way or another (e.g., individualistic rather than collectivistic).

Note, however, countries fall on a continuum of cultural traits. Hofstede’s research demonstrates a wide range between the most individualistic and collectivistic countries, for example—some fall in the middle.

88

Hofstede’s Dimensions. Gert Hofstede, a Dutch researcher, was able to interview a large number of IBM executives in various countries, and found that cultural differences tended to center around four key dimensions: •

Individualism vs. collectivism: To what extent do people believe in individual responsibility and reward rather than having these measures aimed at the larger group? Contrary to the stereotype, Japan actually ranks in the middle of this dimension, while Indonesia and West Africa rank toward the collectivistic side. The U.S., Britain, and the Netherlands rate toward individualism.

•

Power distance: To what extent is there a strong separation of individuals based on rank? Power distance tends to be particularly high in Arab countries and some Latin American ones, while it is more modest in Northern Europe and the U.S.

•

Masculinity vs. femininity involves a somewhat more nebulous concept.

“Masculine” values involve competition and “conquering” nature by means such as large construction projects, while “feminine” values involve harmony and environmental protection. Japan is one of the more masculine countries, while the Netherlands rank relatively low. The U.S. is close to the middle, slightly toward the masculine side. ( The fact that these values are thought of as “masculine” or “feminine” does not mean that they are consistently held by members of each respective gender—there are very large “within-group” differences. There is, however, often a large correlation of these cultural values with the status of women.)

•

Uncertainty avoidance involves the extent to which a “structured” situation with clear rules is preferred to a more ambiguous one; in general, countries with lower uncertainty avoidance tend to be more tolerant of risk. Japan ranks very high. Few countries are very low in any absolute sense, but relatively speaking, Britain and Hong Kong are lower, and the U.S. is in the lower range of the distribution.

High vs. low context cultures: In some cultures, “what you see is what you get”— the speaker is expected to make his or her points clear and limit ambiguity. This is the case in the U.S.—if you have something on your mind, you are expected to say it directly, subject to some reasonable standards of diplomacy. In Japan, in contrast,

89

facial expressions and what is not said may be an important clue to understanding a speaker’s meaning. Thus, it may be very difficult for Japanese speakers to understand another’s written communication. The nature of languages may exacerbate this phenomenon—while the German language is very precise, Chinese lacks many grammatical features, and the meaning of words may be somewhat less precise.

English ranks somewhere in the middle of this continuum.

Ethnocentrism and the self-reference criterion. The self-reference criterion refers to the tendency of individuals, often unconsciously, to use the standards of one’s own culture to evaluate others. For example, Americans may perceive more traditional societies to be “backward” and “unmotivated” because they fail to adopt new technologies or social customs, seeking instead to preserve traditional values. In the 1960s, a supposedly well read American psychology professor referred to India’s culture of “sick” because, despite severe food shortages, the Hindu religion did not allow the eating of cows. The psychologist expressed disgust that the cows were allowed to roam free in villages, although it turns out that they provided valuable functions by offering milk and fertilizing fields. Ethnocentrism is the tendency to view one’s culture to be superior to others. The important thing here is to consider how these biases may come in the way in dealing with members of other cultures.

It should be noted that there is a tendency of outsiders to a culture to overstate the similarity of members of that culture to each other. In the United States, we are well aware that there is a great deal of heterogeneity within our culture; however, we often underestimate the diversity within other cultures. For example, in Latin America, there are great differences between people who live in coastal and mountainous areas; there are also great differences between social classes.

Language Issues. Language is an important element of culture. It should be realized that regional differences may be subtle. For example, one word may mean one thing in one Latin American country, but something off-color in another. It should also be kept in mind that much information is carried in non-verbal communication. In some cultures, we nod to signify “yes” and shake our heads to signify “no;” in other cultures, the practice is reversed. Within the context of language:

90

•

There are often large variations in regional dialects of a given language. The differences between U.S., Australian, and British English are actually modest compared to differences between dialects of Spanish and German.

•

Idioms involve “figures of speech” that may not be used, literally translated, in other languages. For example, baseball is a predominantly North and South American sport, so the notion of “in the ball park” makes sense here, but the term does not carry the same meaning in cultures where the sport is less popular.

•

Neologisms involve terms that have come into language relatively recently as technology or society involved.

With the proliferation of computer

technology, for example, the idea of an “add-on” became widely known. It may take longer for such terms to “diffuse” into other regions of the world. In parts of the World where English is heavily studied in schools, the emphasis is often on grammar and traditional language rather than on current terminology, so neologisms have a wide potential not to be understood.

•

Slang exists within most languages. Again, regional variations are common and not all people in a region where slang is used will necessarily understand this. There are often significant generation gaps in the use of slang.

Writing patterns, or the socially accepted ways of writing, will differs significantly between cultures.

Demographics Demographics are clearly tied to subculture and segmentation. Here, however, we shift our focus from analyzing specific subcultures to trying to understand the implications for an entire population of its makeup.

Several issues are useful in the structure of a population. For example, in some rapidly growing countries, a large percentage of the population is concentrated among younger generations. In countries such as Korea, China, and Taiwan, this has helped stimulate economic growth, while in certain poorer countries, it puts pressures on society to accommodate an increasing number of people on a fixed amount of land.

Other countries such as Japan and Germany, in contrast, experience problems with a "graying" society, where fewer non-retired people are around to support an increasing

91

number of aging seniors. Because Germany actually hovers around negative population growth, the German government has issued large financial incentives, in the forms of subsidies, for women who have children. In the United States, population growth occurs both through births and immigration. Since the number of births is not growing, problems occur for firms that are dependent on population growth (e.g., Gerber, a manufacturer of baby food).

Social class is a somewhat nebulous subject that involves stratifying people into groups with various amounts of prestige, power, and privilege. In part because of the pioneering influence in American history, status differentiations here are quite vague.

We cannot, for example, associate social class with income, because a traditionally low status job as a plumber may today come with as much income as a traditionally more prestigious job as a school teacher. In certain other cultures, however, stratification is more clear-cut. Although the caste system in India is now illegal, it still maintains a tremendous influence on that society. While some mobility exists today, social class awareness is also somewhat greater in Britain, where social status is in part reinforced by the class connotations of the accent with which one speaks.

Textbooks speak of several indices that have been used to "compute" social class in the United States, weighing factors such as income, the nature of one’s employment, and level of education. Taken too literally, these indices are not very meaningful; more broadly speaking, they illustrate the reality that social status is a complex variable that is determined, not always with consensus among observers, by several different variables.

Segmentation, Targeting, and Positioning Segmentation, targeting, and positioning together comprise a three stage process. We first (1) determine which kinds of customers exist, then (2) select which ones we are best off trying to serve and, finally, (3) implement our segmentation by optimizing our products/services for that segment and communicating that we have made the choice to distinguish ourselves that way.

92

Segmentation involves finding out what kinds of consumers with different needs exist. In the auto market, for example, some consumers demand speed and performance, while others are much more concerned about roominess and safety. In general, it holds true that “You can’t be all things to all people,” and experience has demonstrated that firms that specialize in meeting the needs of one group of consumers over another tend to be more profitable.

Generically, there are three approaches to marketing. In the undifferentiated strategy, all consumers are treated as the same, with firms not making any specific efforts to satisfy particular groups. This may work when the product is a standard one where one competitor really can’t offer much that another one can’t. Usually, this is the case only for commodities. In the concentrated strategy, one firm chooses to focus on one of several segments that exist while leaving other segments to competitors. For example, Southwest Airlines focuses on price sensitive consumers who will forego meals and assigned seating for low prices. In contrast, most airlines follow the differentiated strategy: They offer high priced tickets to those who are inflexible in that they cannot tell in advance when they need to fly and find it impractical to stay over a Saturday. These travelers—usually business travelers—pay high fares but can only fill the planes up partially. The same airlines then sell some of the remaining seats to more price sensitive customers who can buy two weeks in advance and stay over.

Note that segmentation calls for some tough choices. There may be a large number of variables that can be used to differentiate consumers of a given product category; yet, in practice, it becomes impossibly cumbersome to work with more than a few at a time. Thus, we need to determine which variables will be most useful in distinguishing different groups of consumers. We might thus decide, for example, that the variables that are most relevant in separating different kinds of soft drink consumers are (1) preference for taste vs. low calories, (2) preference for Cola vs. non-cola taste, (3) price sensitivity—willingness to pay for brand names; and (4) heavy vs. light consumers. We now put these variables together to arrive at various combinations.

Several different kinds of variables can be used for segmentation.

93

•

Demographic variables essentially refer to personal statistics such as income, gender, education, location (rural vs. urban, East vs. West), ethnicity, and family size. Campbell’s soup, for instance, has found that Western U.S. consumers on the average prefer spicier soups—thus, you get a different product in the same cans at the East and West coasts. Facing flat sales of guns in the traditional male dominated market, a manufacturer came out with the Lady Remmington, a more compact, handier gun more attractive to women.

Taking this a step farther, it is also possible to segment on lifestyle and values.”

•

Some consumers want to be seen as similar to others, while a different segment wants to stand apart from the crowd.

•

Another basis for segmentation is behavior. Some consumers are “brand loyal”—i.e., they tend to stick with their preferred brands even when a competing one is on sale. Some consumers are “heavy” users while others are “light” users. For example, research conducted by the wine industry shows that some 80% of the product is consumed by 20% of the consumers— presumably a rather intoxicated group.

•

One can also segment on benefits sought, essentially bypassing demographic explanatory variables. Some consumers, for example, like scented soap (a segment likely to be attracted to brands such as Irish Spring), while others prefer the “clean” feeling of unscented soap (the “Ivory” segment). Some consumers use toothpaste primarily to promote oral health, while another segment is more interested in breath freshening.

In the next step, we decide to target one or more segments. Our choice should generally depend on several factors. First, how well are existing segments served by other manufacturers? It will be more difficult to appeal to a segment that is already well served than to one whose needs are not currently being served well. Secondly, how large is the segment, and how can we expect it to grow? (Note that a downside to a large, rapidly growing segment is that it tends to attract competition). Thirdly, do we have strengths as a company that will help us appeal particularly to one group of consumers? Firms may already have an established reputation. While McDonald’s has a great reputation for fast, consistent quality, family friendly food, it would be difficult to convince consumers that McDonald’s now offers gourmet food. Thus,

94

McD’s would probably be better off targeting families in search of consistent quality food in nice, clean restaurants.

Positioning involves implementing our targeting. For example, Apple Computer has chosen to position itself as a maker of user-friendly computers. Thus, Apple has done a lot through its advertising to promote itself, through its unintimidating icons, as a computer for “non-geeks.” The Visual C software programming language, in contrast, is aimed a “techies.

Michael Treacy and Fred Wiersema suggested in their 1993 book The Discipline of Market Leaders that most successful firms fall into one of three categories: •

Operationally excellent firms, which maintain a strong competitive advantage by maintaining exceptional efficiency, thus enabling the firm to provide reliable service to the customer at a significantly lower cost than those of less well organized and well run competitors. The emphasis here is mostly on low cost, subject to reliable performance, and less value is put on customizing the offering for the specific customer. Wal-Mart is an example of this discipline.

Elaborate logistical designs allow goods to be moved at the lowest cost, with extensive systems predicting when specific quantities of supplies will be needed.

•

Customer intimate firms, which excel in serving the specific needs of the individual customer well. There is less emphasis on efficiency, which is sacrificed for providing more precisely what is wanted by the customer.

Reliability is also stressed. Nordstrom’s and IBM are examples of this discipline.

•

Technologically excellent firms, which produce the most advanced products currently available with the latest technology, constantly maintaining leadership in innovation. These firms, because they work with costly technology that need constant refinement, cannot be as efficient as the operationally excellent firms and often cannot adapt their products as well to the needs of the individual customer. Intel is an example of this discipline.

Treacy and Wiersema suggest that in addition to excelling on one of the three value dimensions, firms must meet acceptable levels on the other two. Wal-Mart, for

95

example, does maintain some level of customer service. Nordstrom’s and Intel both must meet some standards of cost effectiveness. The emphasis, beyond meeting the minimum required level in the two other dimensions, is on the dimension of strength.

Repositioning involves an attempt to change consumer perceptions of a brand, usually because the existing position that the brand holds has become less attractive. Sears, for example, attempted to reposition itself from a place that offered great sales but unattractive prices the rest of the time to a store that consistently offered “everyday low prices.” Repositioning in practice is very difficult to accomplish. A great deal of money is often needed for advertising and other promotional efforts, and in many cases, the repositioning fails.

To effectively attempt repositioning, it is important to understand how one’s brand and those of competitors are perceived. One approach to identifying consumer product perceptions is multidimensional scaling. Here, we identify how products are perceived on two or more “dimensions,” allowing us to plot brands against each other. It may then be possible to attempt to “move” one’s brand in a more desirable direction by selectively promoting certain points. There are two main approaches to multi-dimensional scaling. In the a priori approach, market researchers identify dimensions of interest and then ask consumers about their perceptions on each dimension for each brand. This is useful when (1) the market researcher knows which dimensions are of interest and (2) the customer’s perception on each dimension is relatively clear (as opposed to being “made up” on the spot to be able to give the researcher a desired answer). In the similarity rating approach, respondents are not asked about their perceptions of brands on any specific dimensions. Instead, subjects are asked to rate the extent of similarity of different pairs of products (e.g., How similar, on a scale of 1-7, is Snicker’s to Kitkat, and how similar is Toblerone to Three Musketeers?) Using a computer algorithms, the computer then identifies positions of each brand on a map of a given number of dimensions. The computer does not reveal what each dimension means—that must be left to human interpretation based on what the variations in each dimension appears to reveal. This second method is more useful when no specific product dimensions have been identified as being of particular interest or when it is not clear what the variables of difference are for the product category.

96

Information Search and Decision Making Problem Recognition. One model of consumer decision making involves several steps. The first one is problem recognition—you realize that something is not as it should be. Perhaps, for example, your car is getting more difficult to start and is not accelerating well.

The second step is information search—what are some

alternative ways of solving the problem? You might buy a new car, buy a used car, take your car in for repair, ride the bus, ride a taxi, or ride a skateboard to work. The third step involves evaluation of alternatives. A skateboard is inexpensive, but may be ill-suited for long distances and for rainy days. Finally, we have the purchase stage, and sometimes a post-purchase stage (e.g., you return a product to the store because you did not find it satisfactory). In reality, people may go back and forth between the stages. For example, a person may resume alternative identification during while evaluating already known alternatives.

Consumer involvement will tend to vary dramatically depending on the type of product. In general, consumer involvement will be higher for products that are very expensive (e.g., a home, a car) or are highly significant in the consumer’s life in some other way (e.g., a word processing program or acne medication).

It is important to consider the consumer’s motivation for buying products. To achieve this goal, we can use the Means-End chain, wherein we consider a logical progression of consequences of product use that eventually lead to desired end benefit. Thus, for example, a consumer may see that a car has a large engine, leading to fast acceleration, leading to a feeling of performance, leading to a feeling of power, which ultimately improves the consumer’s self-esteem. A handgun may aim bullets with precision, which enables the user to kill an intruder, which means that the intruder will not be able to harm the consumer’s family, which achieves the desired end-state of security. In advertising, it is important to portray the desired end-states. Focusing on the large motor will do less good than portraying a successful person driving the car.

Information search and decision making. Consumers engage in both internal and external information search.

97

Internal search involves the consumer identifying alternatives from his or her memory. For certain low involvement products, it is very important that marketing programs achieve “top of mind” awareness. For example, few people will search the Yellow Pages for fast food restaurants; thus, the consumer must be able to retrieve one’s restaurant from memory before it will be considered. For high involvement products, consumers are more likely to use an external search. Before buying a car, for example, the consumer may ask friends’ opinions, read reviews in Consumer Reports, consult several web sites, and visit several dealerships. Thus, firms that make products that are selected predominantly through external search must invest in having information available to the consumer in need—e.g., through brochures, web sites, or news coverage.

A compensatory decision involves the consumer “trading off” good and bad attributes of a product. For example, a car may have a low price and good gas mileage but slow acceleration. If the price is sufficiently inexpensive and gas efficient, the consumer may then select it over a car with better acceleration that costs more and uses more gas. Occasionally, a decision will involve a non-compensatory strategy. For example, a parent may reject all soft drinks that contain artificial sweeteners. Here, other good features such as taste and low calories cannot overcome this one “nonnegotiable” attribute.

The amount of effort a consumer puts into searching depends on a number of factors such as the market (how many competitors are there, and how great are differences between brands expected to be?), product characteristics (how important is this product? How complex is the product? How obvious are indications of quality?), consumer characteristics (how interested is a consumer, generally, in analyzing product characteristics and making the best possible deal?), and situational characteristics (as previously discussed).

Two interesting issues in decisions are: •

Variety seeking (where consumers seek to try new brands not because these brands are expected to be “better” in any way, but rather because the consumer wants a “change of pace,” and

98

•

“Impulse” purchases—unplanned buys. This represents a somewhat “fuzzy” group. For example, a shopper may plan to buy vegetables but only decide in the store to actually buy broccoli and corn. Alternatively, a person may buy an item which is currently on sale, or one that he or she remembers that is needed only once inside the store.

A number of factors involve consumer choices. In some cases, consumers will be more motivated. For example, one may be more careful choosing a gift for an in-law than when buying the same thing for one self. Some consumers are also more motivated to comparison shop for the best prices, while others are more convenience oriented. Personality impacts decisions. Some like variety more than others, and some are more receptive to stimulation and excitement in trying new stores.

Perception influences decisions. Some people, for example, can taste the difference between generic and name brand foods while many cannot. Selective perception occurs when a person is paying attention only to information of interest. For example, when looking for a new car, the consumer may pay more attention to car ads than when this is not in the horizon. Some consumers are put off by perceived risk. Thus, many marketers offer a money back guarantee. Consumers will tend to change their behavior through learning—e.g., they will avoid restaurants they have found to be crowded and will settle on brands that best meet their tastes. Consumers differ in the values they hold (e.g., some people are more committed to recycling than others who will not want to go through the hassle). We will consider the issue of lifestyle under segmentation.

Families and Family Decision Making The Family Life Cycle. Individuals and families tend to go through a "life cycle:" The simple life cycle goes from For purposes of this discussion, a "couple" may either be married or merely involve living together. The breakup of a non-marital relationship involving cohabitation is similarly considered equivalent to a divorce.

In real life, this situation is, of course, a bit more complicated. For example, many couples undergo divorce. Then we have one of the scenarios:

99

Single parenthood can result either from divorce or from the death of one parent.

Divorce usually entails a significant change in the relative wealth of spouses. In some cases, the non-custodial parent (usually the father) will not pay the required child support, and even if he or she does, that still may not leave the custodial parent and children as well off as they were during the marriage. On the other hand, in some cases, some non-custodial parents will be called on to pay a large part of their income in child support. This is particularly a problem when the non-custodial parent remarries and has additional children in the second (or subsequent marriages). In any event, divorce often results in a large demand for: •

Low cost furniture and household items

•

Time-saving goods and services

Divorced parents frequently remarry, or become involved in other non-marital relationships; thus, we may see Generally, there are two main themes in the Family Life Cycle, subject to significant exceptions: •

As a person gets older, he or she tends to advance in his or her career and tends to get greater income (exceptions: maternity leave, divorce, retirement).

•

Unfortunately, obligations also tend to increase with time (at least until one’s mortgage has been paid off). Children and paying for one’s house are two of the greatest expenses.

Note that although a single person may have a lower income than a married couple, the single may be able to buy more discretionary items.

Family Decision Making. Individual members of families often serve different roles in decisions that ultimately draw on shared family resources. Some individuals are information gatherers/holders, who seek out information about products of relevance.

These individuals often have a great deal of power because they may selectively pass on information that favors their chosen alternatives. Influencers do not ultimately have the power decide between alternatives, but they may make their wishes known

100

by asking for specific products or causing embarrassing situations if their demands are not met. The decision maker(s) have the power to determine issues such as: •

Whether to buy;

•

Which product to buy (pick-up or passenger car?);

•

Which brand to buy;

•

Where to buy it; and

•

When to buy.

Note, however, that the role of the decision maker is separate from that of the purchaser. From the point of view of the marketer, this introduces some problems since the purchaser can be targeted by point-of-purchase (POP) marketing efforts that cannot be aimed at the decision maker. Also note that the distinction between the purchaser and decision maker may be somewhat blurred: •

The decision maker may specify what kind of product to buy, but not which brand;

•

The purchaser may have to make a substitution if the desired brand is not in stock;

•

The purchaser may disregard instructions (by error or deliberately).

It should be noted that family decisions are often subject to a great deal of conflict.

The reality is that few families are wealthy enough to avoid a strong tension between demands on the family’s resources. Conflicting pressures are especially likely in families with children and/or when only one spouse works outside the home. Note that many decisions inherently come down to values, and that there is frequently no "objective" way to arbitrate differences. One spouse may believe that it is important to save for the children’s future; the other may value spending now (on private schools and computer equipment) to help prepare the children for the future. Who is right?

There is no clear answer here. The situation becomes even more complex when more parties—such as children or other relatives—are involved.

Some family members may resort to various strategies to get their way. One is bargaining—one member will give up something in return for someone else. For example, the wife says that her husband can take an expensive course in gourmet

101

cooking if she can buy a new pickup truck. Alternatively, a child may promise to walk it every day if he or she can have a hippopotamus. Another strategy is reasoning— trying to get the other person(s) to accept one’s view through logical argumentation.

Note that even when this is done with a sincere intent, its potential is limited by legitimate differences in values illustrated above. Also note that individuals may simply try to "wear down" the other party by endless talking in the guise of reasoning (this is a case of negative reinforcement as we will see subsequently). Various manipulative strategies may also be used. One is impression management, where one tries to make one’s side look good (e.g., argue that a new TV will help the children see educational TV when it is really mostly wanted to see sports programming, or argue that all "decent families make a contribution to the church"). Authority involves asserting one’s "right" to make a decision (as the "man of the house," the mother of the children, or the one who makes the most money). Emotion involves making an emotional display to get one’s way (e.g., a man cries if his wife will not let him buy a new rap album).

Group Influences Humans are inherently social animals, and individuals greatly influence each other.

A useful framework of analysis of group influence on the individual is the so called reference group—the term comes about because an individual uses a relevant group as a standard of reference against which oneself is compared. Reference groups come in several different forms.

•

The aspirational reference group refers to those others against whom one would like to compare oneself. For example, many firms use athletes as spokespeople, and these represent what many people would ideally like to be.

•

Associative reference groups include people who more realistically represent the individuals’ current equals or near-equals—e.g., coworkers, neighbors, or members of churches, clubs, and organizations. Paco Underhill, a former anthropologist turned retail consultant and author of the book Why We Buy has performed research suggesting that among many teenagers, the process of clothes buying is a two stage process. In the first stage, the teenagers go on a

102

"reconnaissance" mission with their friends to find out what is available and what is "cool." This is often a lengthy process. In the later phase, parents— who will need to pay for the purchases—are brought. This stage is typically much briefer.

•

Finally, the dissociative reference group includes people that the individual would not like to be like. For example, the store literally named The Gap came about because many younger people wanted to actively dissociate from parents and other older and "uncool" people. The Quality Paperback Book Club specifically suggests in its advertising that its members are "a breed apart" from conventional readers of popular books.

Reference groups come with various degrees of influence. Primary reference groups come with a great deal of influence—e.g., members of a fraternity/sorority.

Secondary reference groups tend to have somewhat less influence—e.g., members of a boating club that one encounters only during week-ends are likely to have their influence limited to consumption during that time period.

Another typology divides reference groups into the informational kind (influence is based almost entirely on members’ knowledge), normative (members influence what is perceived to be "right," "proper," "responsible," or "cool"), or identification. The difference between the latter two categories involves the individual’s motivation for compliance. In case of the normative reference group, the individual tends to comply largely for utilitarian reasons—dressing according to company standards is likely to help your career, but there is no real motivation to dress that way outside the job. In contrast, people comply with identification groups’ standards for the sake of belonging—for example, a member of a religious group may wear a symbol even outside the house of worship because the religion is a part of the person’s identity.

Perception Background. Our perception is an approximation of reality. Our brain attempts to make sense out of the stimuli to which we are exposed. This works well, for example, when we “see” a friend three hundred feet away at his or her correct height; however, our perception is sometimes “off”—for example, certain shapes of ice cream containers look like they contain more than rectangular ones with the same volume.

103

Factors in percpetion. Several sequential factors influence our perception. Exposure involves the extent to which we encounter a stimulus. For example, we are exposed to numerous commercial messages while driving on the freeway: bill boards, radio advertisements, bumper-stickers on cars, and signs and banners placed at shopping malls that we pass. Most of this exposure is random—we don’t plan to seek it out.

However, if we are shopping for a car, we may deliberately seek out advertisements and “tune in” when dealer advertisements come on the radio.

Exposure is not enough to significantly impact the individual—at least not based on a single trial (certain advertisements, or commercial exposures such as the “Swoosh” logo, are based on extensive repetition rather than much conscious attention). In order for stimuli to be consciously processed, attention is needed. Attention is actually a matter of degree—our attention may be quite high when we read directions for getting an income tax refund, but low when commercials come on during a television program. Note, however, that even when attention is low, it may be instantly escalated—for example, if an advertisement for a product in which we are interested comes on.

Interpretation involves making sense out of the stimulus. For example, when we see a red can, we may categorize it as a CokeÒ.

Weber’s Law suggests that consumers’ ability to detect changes in stimulus intensity appear to be strongly related to the intensity of that stimulus to begin with. That is, if you hold an object weighing one pound in your hand, you are likely to notice it when that weight is doubled to two pounds. However, if you are holding twenty pounds, you are unlikely to detect the addition of one pound—a change that you easily detected when the initial weight was one pound. You may be able to eliminate one ounce from a ten ounce container, but you cannot as easily get away with reducing a three ounce container to two (instead, you must accomplish that gradually—e.g., 3.0 --> 2.7 --> 2.5 --> 2.3 --> 2.15 –> 2.00).

Several factors influence the extent to which stimuli will be noticed. One obvious issue is relevance. Consumers, when they have a choice, are also more likely to attend to pleasant stimuli (but when the consumer can’t escape, very unpleasant stimuli are also likely to get attention—thus, many very irritating advertisements are

104

remarkably effective). One of the most important factors, however, is repetition.

Consumers often do not give much attention to a stimuli—particularly a low priority one such as an advertisement—at any one time, but if it is seen over and over again, the cumulative impact will be greater.

Surprising stimuli are likely to get more attention—survival instinct requires us to give more attention to something unknown that may require action. A greater contrast (difference between the stimulus and its surroundings) as well as greater prominence (e.g., greater size, center placement) also tend to increase likelihood of processing.

Subliminal stimuli. Back in the 1960s, it was reported that on selected evenings, movie goers in a theater had been exposed to isolated frames with the words “Drink Coca Cola” and “Eat Popcorn” imbedded into the movie. These frames went by so fast that people did not consciously notice them, but it was reported that on nights with frames present, Coke and popcorn sales were significantly higher than on days they were left off. This led Congress to ban the use of subliminal advertising. First of all, there is a question as to whether this experiment ever took place or whether this information was simply made up. Secondly, no one has been able to replicate these findings.

There is research to show that people will start to giggle with

embarrassment when they are briefly exposed to “dirty” words in an experimental machine. Here, again, the exposure is so brief that the subjects are not aware of the actual words they saw, but it is evident that something has been recognized by the embarrassment displayed.

Learning and Memory Background. Learning involves "a change in the content or organization of long term memory and/or behavior." The first part of the definition focuses on what we know (and can thus put to use) while the second focuses on concrete behavior. For example, many people will avoid foods that they consumed shortly before becoming ill.

Learning is not all knowledge based. For example, we may experience the sales people in one store being nicer to us than those in the other. We thus may develop a

105

preference for the one store over the other; however, if pressed, we may not be able to give a conscious explanation as to the reason for our preference.

Much early work on learning was actually done on rats and other animals (and much of this research was unjustifiably cruel, but that is another matter).

Classical Conditioning: Pavlov’s early work on dogs was known as classical conditioning. Pavlov discovered that when dogs were fed meat powder they salivated.

Pavlov then discovered that if a bell were rung before the dogs were fed, the dogs would begin salivating in anticipation of being fed (this was efficient, since they could then begin digesting the meat powder immediately). Pavlov then found that after the meat had been "paired" with the meat powder enough times, Pavlov could ring the bell without feeding the dogs and they would still salivate.

In the jargon of classical conditioning, the meat powder was an unconditioned stimulus (US) and the salivation was, when preceded by the meat powder, an unconditioned response (UR). That is, it is a biologically "hard-wired" response to salivate when you are fed. By pairing the bell with the unconditioned stimulus, the bell became a conditioned stimulus (CS) and salivation in response to the bell (with no meat powder) became a conditioned response (CR).

Operant Conditioning: Instrumental, or operant, conditioning, involves a different series of events, and this what we usually think of as learning.

There are three major forms of operant learning. In positive reinforcement, an individual does something and is rewarded. He or she is then more likely to repeat the behavior. For example, you eat a candy bar (behavior), it tastes good (consequence), and you are thus more likely to eat a similar candy bar in the future (behavioral change).

Punishment is the opposite. You eat what looks like a piece of candy (behavior), only to discover that it is a piece of soap with a foul taste (consequences), and subsequently you are less likely to eat anything that looks remotely like that thing ever again (changed behavior).

106

It should be noted that negative reinforcement is very different from punishment. An example of negative reinforcement is an obnoxious sales person who calls you up on the phone, pressuring you into buying something you don’t want to do (aversive stimulus). You eventually agree to buy it (changed behavior), and the sales person leaves you alone (the aversive stimulus is terminated as a result of consequences of your behavior).

In general, marketers usually have relatively little power to use punishment or negative reinforcement. However, parking meters are often used to discourage consumers from taking up valuable parking space, and manufacturers may void warranties if the consumers take their product to non-authorized repair facilities.

Several factors influence the effectiveness of operant learning. In general, the closer in time the consequences are to the behavior, the more effective the learning. That is, electric utilities would be more likely to influence consumers to use less electricity at peak hours if the consumers actually had to pay when they used electricity (e.g., through a coin-slot) rather than at the end of the month. Learning is also more likely to occur when the individual can understand a relationship between behavior and consequences (but learning may occur even if this relationship is not understood consciously).

Another issue is schedules of reinforcement and extinction. Extinction occurs when behavior stops having consequences and the behavior then eventually stops occurring.

For example, if a passenger learns that yelling at check-in personnel no longer gets her upgraded to first class, she will probably stop that behavior. Sometimes, an individual is rewarded every time a behavior is performed (e.g., a consumer gets a soft drink every time coins are put into a vending machine). However, it is not necessary to reward a behavior every time for learning to occur. Even if a behavior is only rewarded some of the time, the behavior may be learned. Several different schedules of reinforcement are possible: •

Fixed interval: The consumer is given a free dessert on every Tuesday when he or she eats in a particular restaurant.

107

•

Fixed ratio: Behaviour is rewarded (or punished) on every nth occasion that it is performed. (E.g., every tenth time a frequent shopper card is presented, a free product is provided).

•

Variable ratio: Every time an action is performed, there is a certain percentage chance that a reward will be given. For example, every time the consumer enters the store, he or she is given a lottery ticket. With each ticket, there is a 20% chance of getting a free hamburger. The consumer may get a free hamburger twice in a row, or he or she may go ten times without getting a hamburger even once.

Variable ratio reinforcement is least vulnerable to extinction.

Sometimes, shaping may be necessary to teach the consumer the desired behavior.

That is, it may be impossible to teach the consumer to directly perform the desired behavior. For example, a consumer may first get a good product for free (the product itself, if good, is a reward), then buy it with a large cents off coupon, and finally buy it at full price. Thus, we reinforce approximations of the desired behavior. Rather than introducing Coca Cola directly in Indonesia, fruit flavored soft drinks were first introduced, since these were more similar to beverages already consumed.

Vicarious Learning: The consumer does not always need to go through the learning process himself or herself—sometimes it is possible to learn from observing the consequences of others. For example, stores may make a big deal out of prosecuting shop lifters not so much because they want to stop that behavior in the those caught, but rather to deter the behavior in others. Similarly, viewers may empathize with characters in advertisements who experience (usually positive) results from using a product. The Head ‘n’ Shoulders advertisement, where a poor man is rejected by women until he treats his dandruff with an effective cure, is a good example of vicarious learning.

Memory ranges in duration on a continuum from extremely short to very long term.

Sensory memory includes storage of stimuli that one might not actually notice (e.g., the color of an advertisement some distance away). For slightly longer duration, when you see an ad on TV for a mail order product you might like to buy, you only keep the phone number in memory until you have dialed it. This is known as short

108

term memory. In order for something to enter into long term memory, which is more permanent, you must usually “rehearse” it several times. For example, when you move and get a new phone number, you will probably repeat it to yourself many times. Alternatively, you get to learn your driver’s license or social security numbers with time, not because you deliberately memorize them, but instead because you encounter them numerous times as you look them up.

Several techniques can be used to enhance the memorability of information.

“Chunking” involves rearranging information so that fewer parts need to be remembered. For example, consider the phone number (800) 444-1000. The eight digits can be more economically remembered as an 800 number (1 piece), four repeated 3 times (2 pieces), and 1000 (1-2 pieces). “Rehearsal” involves the consumer repeating the information over and over so that it can be remembered; this is often done so that a phone number can be remembered while the “memoree” moves to the phone to dial it. “Recirculation” involves repeated exposure to the same information; the information is not learned deliberately, but is gradually absorbed through repetition. Thus, it is to the advantage to a marketer to have an advertisement repeated extensively—especially the brand name.

“Elaboration” involves the

consumer thinking about the object—e.g., the product in an advertisement—and thinking about as many related issues as possible. For example, when seeing an ad for Dole bananas, the person may think of the color yellow, going to the zoo seeing a monkey eating a banana, and her grandmother’s banana-but bread. The Dole brand name may then be activated when any of those stimuli are encountered.

Memories are not always easily retrievable. This could be because the information was given lower priority than something else—e.g., we have done a lot of things since last buying a replacement furnace filter and cannot remember where this was bought last. Other times, the information can be retrieved but is not readily “available”—e.g., we will be able to remember the location of a restaurant we tried last time we were in Paris, but it may take some thinking before the information emerges.

“Spreading activation” involves the idea of one memory “triggering” another one.

For example, one might think of Coke every time one remembers a favorite (and very wise) professor who frequently brought one to class. Coke might also be tied a particular supermarket that always stacked a lot of these beverages by the entrance, 109

and to baseball where this beverage was consumed after the game. It is useful for firms to have their product be activated by as many other stimuli as possible.

There are numerous reasons why retrieval can fail or, in less fancy terms, how we come to forget. One is decay. Here, information that is not accessed frequently essentially “rusts” away. For example, we may not remember the phone number of a friend to whom we have not spoken for several months and may forget what brand of bullets an aunt prefers if we have not gone ammunition shopping with her lately.

Other times, the problem may rest in interference. Proactive interference involves something we have learned interfering with what we will late later. Thus, if we remember that everyone in our family always used Tide, we may have more difficulty later remembering what other brands are available. You may be unable to remember what a new, and less important, friend’s last name is if that person shares a first name with an old friend. For example, if your best friend for many years has been Jennifer Smith, you may have difficulty remembering that your new friend Jennifer’s last name is Silverman. In retroactive interference, the problem is the reverse—learning something new blocks out something old.

For example, if you once used

WordPerfect than then switched to Microsoft Word, you may have trouble remembering how to use WordPerfect at a friend’s house—more so than if you had merely not used any word processing program for some time.

Memorability can be enhanced under certain conditions. One is more likely to remember favorable—or likable stimuli (all other things being equal). Salience—or the extent to which something is highly emphasized or very clearly evident— facilitates memory. Thus, a product which is very visible in an ad, and handled and given attention by the actors, will more likely be remembered. Prototypicality involves the extent to which a stimulus is a “perfect” example of a category.

Therefore, people will more likely remember Coke or Kleenex than competing brands. Congruence involves the “fit” with a situation. Since memory is often reconstructed based on what seems plausible, something featured in an appropriate setting—e.g., charcoal on a porch next to a grill rather than in a garage or kitchen—is more likely to be remembered (unless the incongruence triggers an elaboration—life is complicated!) Redundancies involve showing the stimulus several times. Thus, if

110

a given product is shown several places in a house—and if the brand name is repeated —it is more likely to be remembered.

Priming involves tying a stimulus with something so that if “that something” is encountered, the stimulus is more likely to be retrieved. Thus, for example, when one thinks of anniversaries, the Hallmark brand name is more likely to be activated. (This is a special case of spreading activation discussed earlier).

A special issue in memory is so called “scripts,” or procedures we remember for doing things. Scripts involve a series of steps for doing various things (e.g., how to send a package). In general, it is useful for firms to have their brand names incorporated into scripts (e.g., to have the consumer reflexively ask the pharmacist for Bayer rather than an unspecified brand of aspirin).

Positioning involves implementing our targeting. For example, Apple Computer has chosen to position itself as a maker of user-friendly computers. Thus, Apple has done a lot through its advertising to promote itself, through its un-intimidating icons, as a computer for “non-geeks.” The Visual C software programming language, in contrast, is aimed a “techies.”

Repositioning involves an attempt to change consumer perceptions of a brand, usually because the existing position that the brand holds has become less attractive. Sears, for example, attempted to reposition itself from a place that offered great sales but unattractive prices the rest of the time to a store that consistently offered “everyday low prices.” Repositioning in practice is very difficult to accomplish. A great deal of money is often needed for advertising and other promotional efforts, and in many cases, the repositioning fails.

Organizational Buyers A large portion of the market for goods and services is attributable to organizational, as opposed to individual, buyers. In general, organizational buyers, who make buying decisions for their companies for a living, tend to be somewhat more sophisticated than ordinary consumers. However, these organizational buyers are also often more risk averse. There is a risk in going with a new, possibly better (lower price or higher

111

quality) supplier whose product is unproven and may turn out to be problematic.

Often the fear of running this risk is greater than the potential rewards for getting a better deal. In the old days, it used to be said that “You can’t get fired for buying IBM.” This attitude is beginning to soften a bit today as firms face increasing pressures to cut costs.

Organizational buyers come in several forms. Resellers involve either wholesalers or retailers that buy from one organization and resell to some other entity. For example, large grocery chains sometimes buy products directly from the manufacturer and resell them to end-consumers. Wholesalers may sell to retailers who in turn sell to consumers. Producers also buy products from sub-manufacturers to create a finished product. For example, rather than manufacturing the parts themselves, computer manufacturers often buy hard drives, motherboards, cases, monitors, keyboards, and other components from manufacturers and put them together to create a finished product. Governments buy a great deal of things. For example, the military needs an incredible amount of supplies to feed and equip troops. Finally, large institutions buy products in huge quantities. For example, UCR probably buys thousands of reams of paper every month.

Organizational buying usually involves more people than individual buying. Often, many people are involved in making decisions as to (a) whether to buy, (b) what to buy, (c) at what quantity, and (d) from whom. An engineer may make a specification as to what is needed, which may be approved by a manager, with the final purchase being made by a purchase specialist who spends all his or her time finding the best deal on the goods that the organization needs. Often, such long purchase processes can cause long delays. In the government, rules are often especially stringent—e.g., vendors of fruit cake have to meet fourteen pages of specifications put out by the General Services Administration. In many cases, government buyers are also heavily bound to go with the lowest price. Even if it is obvious that a higher priced v vendor will offer a superior product, it may be difficult to accept that bid.

112

WALMART AND ITS IMPACT ON UNORGANIZED RETAIL Impact on Shopkeepers, Traders and Hawkers

After farming, retailing is India’s major occupation. Census 2001 provides us the most authentic data on people involved in retail. According to it, there were 269 lakh ‘main’ and 24 lakh marginal workers in wholesale and retail trade. That is, nearly three crore people depend on trade, 1.1 crore in the urban and 1.9 crore in the rural areas. Of the total, nearly 1.7 crore are not even matriculates. Thus, the livelihood of more than 30 million is involved and if we count the dependents, in the form of children and others, at least 120 million will be impacted by the retail revolution created by the large corporations. The growth of corporate retail will take place by destroying the self-organized small retail in India.

In past researches have shown us that a growth in unemployment leads to a series of social problems, like rise in poverty, alcoholism, domestic violence, indebt ness, suicides, crime and have major implications by even making the political

113

situation unstable. If we are following the American model of Walmart where the store employee gets a salary is below the poverty line and the top management gets millions of dollars every year. We are following a trend that increases the divide between rich and the poor and history has shown us that these divide have always led to social unrest and political turmoil of a nation.

Reliance and Walmart are presenting themselves as friends and liberators of farmers and they refer to small traders as middleman, as if they are not giant middleman. Atleast in case of small traders, farmers have a choice in terms of whom to sell. The APMC Acts also ensures that farmers would get a fair price and there would be no single buyer. In contrast, Reliance and Walmart are monopnistic (a situation when there is one buyer and too many sellers) buyers who in due course of time will drive down procurement prices of agricultural and manufactured products. They claim that they are paying more to the farmers, but the truth is that they are at present procuring from the existing mandis all across the nation, and not straight from the farmers, so there is no question of paying better returns to the farmers.

We have seen the dismantling of mandis in last couple of years in various parts of the country. The primary force behind this was the corporate entry into the supply chain management of food. It is true that this year they have paid better prices to the farmers than the mandis, what is threatening is the reduction in the number of options the farmer is left with to sell his/her crop. Similarly for the manufactured goods, the prices paid by the retails giants might be more competitive than others, but after other retails are wiped out, how many options will the producer have to sell his/her products. Farmers will be bound to produce as per the will of these corporations and have to sell at cheaper prices as decided by them. The experience of farmers of west has been the like this. If we also keep moving in the same fashion and there is no doubt that our farmers will also have to face such situation.

Impact on Workers, Suppliers & Existing Industries Another threat that we will be facing is the opening of a giant pipeline of cheaply sourced goods from China, Thailand, ASEAN, etc., which could lead to unfair competition and livelihood losses on a massive scale in India. Currently if Wal114

Mart were a country they would rank as China’s 6th largest trading partner. As they and others seek to enter India, there are no regulations insisting that products are Indian made. However, on the other hand, as corporate retail—both domestic and foreign—grows in India they have more power over local manufacturers.

Because large corporations like Wal-Mart and Reliance are able to buy in such bulk they contract with only a selected list of manufacturers, and are then able to exert pressure on them over time to cut costs. This directly translates to workers working longer hours for less pay and the closing of factories that cannot keep up with the competition.

Environmental And Health Impact Climate change

Climate change due to air pollution is already becoming a threat to human life.

Temperatures are rising, sea level is rising and glaciers are melting. The imperative in the context of climate change is to prevent increase of use of fossil fuel. Our hawker, redi wala and kirana store is the solution to climate change. The Reliance, Bharti-Walmart model will increase fossil fuel use and carbon emissions. Further destabilizing the climate the super market Lorries will consume huge amount of fuel and lead to enormous pollution.

Even if we go by conservative estimates the super market Lorries in India will generate more than 7 million tonnes of carbon dioxide per year, adding more problems to the already fragile environment of the country. When petroleum is becoming more and scarcer, the Lorries of these supermarkets will consume more than 1 billion litre of petroleum per year. For refrigeration of the vegetables and fruits, and for air-conditioning the retail outlets at-least 20,000 megawatt of additional electricity will be needed. We need to burn millions of tonnes of coal everyday to get this energy; the carbon-dioxide released from burning this coal

115

will substantially affect the climate patterns of the country. We are already in a stage where the present levels of pollution, and carbon-dioxide emissions is going to wipe out the human existence out of world in a few years, at this point creating any model that increases carbon-dioxide in the environment will be disastrous to all of us, even the propagators of this model.

Excessive Pesticides The giant retail chains have their own standards of buying farm produce, without using excessive pesticides it’s very difficult for a farmer to produce fruits and vegetable which fits into the standards, so they are forced to use excessive insecticides and pesticides.

Once these farm produce come to the retail giants, they sell it throughout the year, by preserving them in cold storage, but in the process a lot of preservatives are also added to the food. So at the end when a consumer gets a “preserved” vegetable from these giant stores, it is full of toxic material harmful for consumption.

Packaging Packaging of food creates a huge amount of waste in the already polluted cities.

At a time when every city in the country is struggling to solve the problem of solid waste, increase in the packaging waste due to the mall culture will add to their woes. The existing land fills are getting filled and then more land of the poor farmers will be acquired to make landfills for reliance’s and Walmart’s packaging waste.

Research Findings on Wal-Mart Wal-Mart is the largest corporation in the world. Their annual revenue of over 350 billion is larger than the entire Indian retail market. They are currently banned from entering into India, but are trying to come in through the back-door by

116

signing a Joint Venture with Bharti Enterprises (AirTel). They have not yet signed the deal. They must be stopped •

A study by Kenneth Stone of Iowa State University found that some rural

towns in the USA lost 47% of their retail trade after the opening up of a WalMart.

•

A study by Stephan J. Goetz of the Pennsylvania State University and Hema

Swaminathan of the International Center for Research on Women found that counties in the USA where Wal-Marts located experienced increases in family poverty as compared to similar counties where there was no Wal-Mart.

•

The Congressional Research Department of the Representative George Miller

in the USA put together a compendium of Wal-Mart’s labour abuses in that country.

•

Another study by David Neumark, Junfu Zhang, and Stephen Ciccarella found

that Wal-Mart decreased employment by 2-4%, and reduced wages by 5%.

•

An article in Workforce Management describes how Wal-Mart has turnover of

600,000 associates per year, accusations of wholesale discrimination against women, and violations of overtime laws.

•

An article in Main Street News describes how the addition of retail space

overwhelms police, costing more in calls and improvements than is generated in extra tax revenue.

Fact Sheet Against Wal-Mart in India  Wal-Mart recently had to close down its business in Germany and Korea as it was found indulged in ‘Predatory Pricing’ (selling at lower price than its cost price) which is not allowed in these countries.  Wal-Mart is facing a class lawsuit for pay discrimination against 1.5 million female US employees after a court approved the action. A federal appeals court upheld a 2004 ruling giving the lawsuit class action status, sanctioning claims from up to 1.5 million current and former staff. The original lawsuit was filed in

117

2001 by six women who either worked for Wal-Mart or had done so in the past.

The San Francisco court ruled that the country’s largest class action lawsuit against a private employer could proceed. Judge Martin Jenkins said sufficient evidence existed of discriminatory practices dating back to 1998 to support the case going to trial. “Factual evidence, statistical evidence and anecdotal evidence present significant proof of a corporate policy of discrimination and support plaintiff’s contention that female employees nationwide were subjected to a common pattern and practice of discrimination,” he said.  Wal-Mart ordered to pay millions as compensation to workers The world’s largest retailer, Wal-Mart, was ordered to pay at least $78m (£42m) in

compensation to workers who were forced to work during breaks. A jury in a

Pennsylvania court decided that Wal-Mart broke a state law by refusing to pay staff for the extra work they did. The class action was brought by about 187,000 staff who worked for Wal-Mart between March 1997 and May 2006.  Notorious for anti labour practices Wal-Mart is notorious for its anti union practices and does not allow union right to workers ll over the world. Only recently, they have been forced by the Chinese Government to llow union in China where workers are sweating day in and out to produce goods for al-Mart at low cost. Ernest Duran, of the United Food and Commercial Workers Union, ays efforts at collective bargaining have met opposition from Wal-Mart. 

Human Rights Watch report against Wal-Mart

International organization Human Rights Watch on May 1, International Worker’s ay, 2007 which documents the U.S.-based retail giant Wal-Mart’s anti-union ractices in the United States. In the report entitled, “Discounting Rights: Walmart’s Violation of US Workers’ Right to Freedom of Association,” Human Rights Watch found “that while many American companies use weak US laws to stop workers from organizing, the retail giant aggressiveness of its anti-union 118

apparatus “stands out for the sheer magnitude and power. The Human Rights Watch investigation reveals that Wal-Mart begins to indoctrinate workers and managers to oppose unions from the moment they are hired. Managers receive explicit instructions on keeping out unions, many of which are found in the company’s ‘Manager’s Toolbox,’ a self-described guide to managers on ‘how to remain union free in the event union organizers choose your facility as their next target.’ 

Impact on Suppliers Main supplying factories feel the pressure of

shrinking profit margins with Wal-Mart and pass on that pressure to the unorganized labour in the factories who earn a very low wage and can be made to do unpaid overtime work. Average wages of workers in Bangalore supplier factories supplying to Wal-Mart, are lower then in factories not supplying to WalMart.

Global retail sales are estimated to cross US$12 trillion in 2007.1 Almost reflecting the growth in the world economy, global retail sales grew strongly in the last five years (2001-06) at an average nominal growth of about 8 per cent per annum in dollar terms This is in contrast to near stagnant global retail sales during the previous five years, 1996-01. Grocery dominates retail sales with a share of approximately 40 per cent which varies from about 30 per cent in rich Japan to an average of 60 per cent in poor Africa. Retail sales through modern formats have been rising faster than total retail sales; the share of modern retail has risen from about 45 per cent in 1996 to over 52 per cent in 2006.

1996

Total

2001

2002

2003

2004

2005

2006

CAGR

CAGR

(1996

(2001-06)

7682

7833

7987

8827

9833

10657

11375

-01) 0.4

7.7

3284

3161

3213

3571

3970

4308

4611

-0.8

7.8

Retail Sales1 (US$ bn) Total Grocery Sales1 (US$ bn)

119

Modern

3478

3916

4149

4672

5246

5633

5969

2.4

8.8

2577

2816

2979

3378

3800

4074

4325

1.8

9.0

30055

31889

32888

36904

41470

44713

48141

1.2

8.6

Retail Sales2 (US$ bn) Modern Grocery Sales2 (US$ bn) Nominal GDP (US$ bn)

1 Excluding VAT or sales tax; 2 Including VAT or sales tax; 3 Compound annual growth rate.

Source: Planet Retail Database.

Organized v/s Unorganized Retail In the developed economies, organized retail is in the range of 75-80 per cent of total retail, whereas in developing economies, the unorganized sector dominates the retail business. The share of organized retail varies widely from just one per cent in Pakistan and 4 per cent in India to 36 per cent in Brazil and 55 per cent in Malaysia (Table 2.2). Modern retail formats, such as hypermarkets, superstores, supermarkets, discount and convenience stores are widely present in the developed world, whereas such forms of retail outlets have only just begun to spread to developing countries in recent years. In developing countries, the retailing business continues to be dominated by family-run neighbourhood shops and open markets. As a consequence, wholesalers and distributors who carry products from industrial suppliers and agricultural producers to the independent family-owned shops and open markets remain a critical part of the supply chain in these countries.

COUNTRY

TOTAL

RETAIL

SHARE

SALES

ORGANIZED

(US$ Bn)

RETAIL (%)

OF

120

USA JAPAN CHINA UK FRANCE GERMANY INDIA BRAZIL RUSSIA SOUTH KOREA INDONESIA POLAND THAILAND PAKISTAN URGENTINA PHILIPPINES MALAYSIA CZECH REPUBLIC VIETNAM HUNGARY

2983 1182 785 475 436 421 322 284 276 201 150 120 68 67 53 51 34 34 26 24

85 66 20 80 80 80 4 36 33 15 30 20 40 1 40 35 55 30 22 30

Source: Planet Retail and Technopak Advisers Pvt. Ltd.

Spread of Modern Retail in Developing Countries The arrival of modern retail in developing countries occurred in three successive waves (Reardon and Hopkins, 2006; Reardon and Berdegue, 2007). The first wave took place in the early to mid-1990s in South America (e.g., Argentina, Brazil, and Chile), East Asia outside China (South Korea, Malaysia, Philippines, Thailand, and Taiwan), North-Central Europe (e.g., Poland, Hungary, and Czech Republic) and South Africa. The second wave happened during the mid to late 1990s in Mexico, Central America (e.g., Ecuador, Colombia, and Guatemala), Southeast Asian countries (e.g., Indonesia), Southern-Central Europe (e.g., Bulgaria). The third wave has just begun in the late 1990s and early 2000s in parts of Africa (e.g., Kenya), some countries in Central and South America (e.g.

Nicaragua, Peru, and Bolivia), Southeast Asia (e.g., Vietnam), China, India, and Russia.

Thus, the third wave countries which include China, India and Russia are late comers in the diffusion of modern retail. According to the authors, the main 121

reason why they lagged behind was the severe restrictions on foreign direct investment (FDI) in retailing in these countries. The demand side features of these countries, such as income, size of the middle class, urbanization, and the share of women in workforce, etc., have been similar to countries in the second wave. In China and Russia these restrictions were progressively relaxed in the 1990s and in India partially in the 2000s. In January 2006, India allowed foreign companies to own up to 51 per cent in singlebrand retail joint ventures (JVs), but multiple-brand foreign firms are still barred in retail although they can set up wholesale operations.

Globalization of Retail There has been a creeping internationalization of retailing over the recent period.

As home markets have become crowded and with opportunities in emerging markets rising, modern retailers from developed countries have been turning to new markets. On an average each of the top 250 retailers in the world have operated on an average in 5.9 countries in 2005-06 (July-June) against five countries in 2000-01 (Deloitte- Stores Report, 2007). Foreign business accounted for 14.4 per cent of retail sales of these companies in 2005-06 up from 12.6 per cent in 2000-01. The retail sales growth of companies which have ventured into foreign markets has been faster than those that have confined themselves to home markets. As far as the international expansion is concerned, West European and South African retail companies are the most outward looking. The West European firms, among the top 250 retailers, expanded into an average of 9.9 countries in 2005-06 and generated 28.1 per cent of their sales from foreign operations, largely in Central and Eastern Europe. The five South African retailers in the top 250 list conducted business in an average of 8.8 countries particularly in the African continent in 2005-06, generating on an average 13 per cent of these companies’ sales. The US retailers are mostly home-market based operating just in an average of 3.7 countries outside US in 2005- 06 up from three countries in 2000-01 and two countries in 1996-97. The US retailer Wal-Mart, the world’s biggest retailer, is a notable exception operating in 14 countries in 2007. Most of the Japanese retailers are insular operating only domestically.

122

Regulatory Framework It is interesting to note that regulatory restrictions on the growth in modern retail is more stringent in developed rather than in developing countries. For example, in most West European countries, setting up of hypermarkets has become very difficult since the late 1990s and early 2000s as governments became alive to the demands of traditional small retailers and non-mobile consumers in these countries. Merger and acquisition plans are now looked at more critically by the national and European competition authorities. While in most countries opening hours are liberalized including holiday trading, the very small number of countries where opening on Sundays are prohibited include developed countries such as Germany and Austria (Planet Retail).

As noted by Reardon and Hopkins (2006), there are four types of policy regulations that can be seen in countries which have experienced advanced retail expansion. They are: • Competition policy that limits concentration and collusion.

• Zoning and hours regulations to limit the diffusion, market penetration, and convenience of organized retail.

• Pricing regulations that prevent modern retail companies from pricing below cost and prompt-payment regulations to secure speedy payment to suppliers.

• Policies to strengthen traditional retailers and suppliers through technology and practice upgrading, enhancing organizational capacity, and financial access.

The above regulations were put in place in different countries basically with a view to balance the conflicts of interests between modern retail, on the one hand and the traditional retailers and suppliers to the modern retail, on the other.

Recently, countries in Southeast Asia (Malaysia, Indonesia, and Thailand) imposed a number of restrictions on the growth of large retail companies particularly the transnational companies in contrast to a fairly liberal approach to the retail sector followed until the late 1990s. These restrictions involve the use of a combination of competition laws, FDI regulation, land use restrictions (zoning laws), and limits on operating hours (Mutebi, 2007).

123

Future Trends The Deloitte-Stores (2007) study held that the retail business would slow down definitely over the next decade in developed countries, while it would grow strongly in developing countries. This is based on a projection of three significant changes that will occur. First, the population in the age-group 50-70 years and above in the developed world will explode, shifting the share of consumer spending further away from goods towards services, such as travel, healthcare and maintenance of the elderly. Second, the population growth in the age-group 20-35 years in these countries will be relatively modest making the hiring of entry-level workers difficult, while the population in the age-group 35-50 years will decline leading to acute shortage of middle and upper management positions. Third, in developing countries, there will be plentiful supply of workforce and consumers in the younger age groups. Besides, this demographic shift will make the developing countries more dynamic and risk-taking enabling them to grow much faster than the developed world. Driven by these trends, it is expected that retailers in developed countries will increasingly move to the markets of developing countries for growth.

Indian Retail The growth of the retail trade in India is associated with the growth in the Indian economy. Gross domestic product (GDP) grew by an annual rate of 6.6 per cent during 1994-00 but the growth slackened to 4.7 per cent per annum during the next three years before the growth remarkably rose to 8.7 per cent per annum in the last four years (Table 2.3). This meant a substantial rise in disposable income of Indian households since the mid-1990s. Based on the Market Information Survey of Households (MISH) of the National Council of Applied Economic Research (NCAER), the number of people in the income groups of “aspirers� and the middle class with annual income ranging from Rs. 90,000 to one million, more than doubled from 157 million to 327 million during the last decade 1995-96 to 2005-06.3 The data from the Central Statistical Organization (CSO) indicate that the growth of real private final consumption expenditure, which dipped from an 124

average of 5.7 per cent per annum during 1994-00 to 4 per cent per annum during 2000-03, shot up to 6.7 per cent per annum during 2003-07. Retail sales (in nominal terms) in the country also followed a similar pattern: a high annual growth of 13.6 per cent during 1994-00, a low growth of 4.8 per cent during 200003 and a smart pick up in the last four years, 2003-07 at around 11 per cent.

The international consulting firm, A.T. Kearney, annually ranks emerging market economies based on more than 25 macroeconomic and retail-specific variables through their Global Retail Development Index (GRDI). For the last three years (2005, 2006, and 2007) India has been ranked as number one indicating that the country is the most attractive market for global retailers to enter. The high economic growth during the last few years raising disposable incomes rapidly, favourable demographics placing incomes on younger population with less dependency, and urbanization are some of the major factors fueling the Indian retail market.

Employment and Output in the Retail Sector Retail is a labour-intensive economic activity. According to the Economic Census carried out by the CSO in 1998, the country had a total of 10.69 million enterprises engaged in retail trade, of which 5.23 million were in the rural areas and 5.46 million in the urban areas. The total employment in these enterprises in 1998 was 18.54 million of which 7.88 million was in the rural sector and 10.65 million in the urban sector. Economic Census has been carried out for 2005 but its detailed results are yet to be released. However, according to NSSO’s Employment and Unemployment Survey for 2004-05, employment in the retail trade has been 35.06 million, divided between rural (16.08 million) and urban (18.98 million) sectors.4 This constituted about 7.3 per cent of the workforce in the country (459 million). Wholesale trade, on the other hand, contributed to an employment of 5.48 million, of which only 1.71 million was in the rural sector and 3.77 million in the urban sector.

The NSSO data also indicated that retail employment was about 30.62 million in 1999-00 with 12.15 million in rural areas and much higher at 18.47 million in the 125

urban areas. This means that an additional employment of 4.44 million was added in this sector during the five-year period, 2000-05, showing an annual employment growth of 2.7 per cent per annum. However, it is interesting to note that the retail employment growth has been quite large in the rural sector – there has been a massive rise in employment in rural retailing of 3.93 million during 2000-05 – and the urban sector has also shown an employment growth, but only of 0.51 million during this period.

According to CSO estimates, total domestic trade, both wholesale and retail included, constituted about 15.1 per cent of India’s GDP in 2006-07, a successive increase in share from 13 per cent of GDP in 1999-00.

Taking into account the fact that retail trade is more labour intensive than wholesale trade, the contribution of retail trade alone to GDP can be estimated to be around 11-12 per cent in 2006-07.

Indian retail is dominated by a large number of small retailers consisting of the local kirana shops, owner-manned general stores, chemists, footwear shops, apparel shops, paan and beedi shops, hand-cart hawkers, pavement vendors, etc. which together make up the so-called “unorganized retail” or traditional retail.

The last 3-4 years have witnessed the entry of a number of organized retailers6 opening stores in various modern formats in metros and other important cities.

Still, the overall share of organized retailing in total retail business has remained low.

While total retail sales have grown from Rs. 10,591 billion (US$ 230 billion) in 2003-04 to Rs. 14,574 billion (US$ 322 billion) in 2006- 07, which is at an annual compound growth rate of about 11 per cent, the organized retail sales grew much more at about 20 per cent per annum from Rs. 350 billion

126

GROWTH OF INDIAN RETAIL : TOTAL v/s ORGANIZED

CAGR 2003-

2004-

2005-

2006-

(2004-

04

05

06

07

07 %)

INDIA RETAIL (Rs. Bn) FOOD & GROCERY BEWERAGES CLOTHING & FOOTWEAR FURNITURE, FURNISHING,

7,028 212 777

7,064 309 993

7,418 373 1,036

8,680 518 1,356

7.3 34.7 20.4

APPLIANCES & SERVICES NON INSTITUTIONAL

512

656

746

986

24.4

HEALTHCARE SPORTS GOODS,

950

972

1,022

1,159

6.9

EQUIPMENTS & BOOKS PERSONAL CARE JEWELLERY, WATCHES

212 371

272 433

308 465

395 617

23 18.5

etc.

530

610 11,30

655 12,02

863 14,57

17.7

10,591

8

3

4

11.2

ENTERTAINMENT

TOTAL RETAIL

ORGANIZED RETAIL (Rs. Bn) FOOD & GROCERY BEWERAGES CLOTHING & FOOTWEAR FURNITURE, FURNISHING,

39 11 168

44 12 189

50 13 212

61 16 251

16.5 14.7 14.3

APPLIANCES & SERVICES NON INSTITUTIONAL

67

75

85

101

14.8

HEALTHCARE

14

16

19

24

20

127

SPORTS GOODS, ENTERTAINMENT EQUIPMENTS & BOOKS PERSONAL CARE JEWELLERY, WATCHES

25 11

33 15

44 22

63 33

37 46.9

etc.

TOTAL ORGANIZED

18

24

33

49

40.5

350

408

479

598

19.5

3.3

3.6

4

4.1

RETAIL SHARE OF ORGANIZED RETAIL IN TOTAL RETAIL (%)

Source: CSO, NSSO, and Technopak Advisers Pvt. Ltd. (US$ 7.6 billion) in 2003-04 to Rs. 598 billion (US$ 13.2 billion) in 2006-07. As a result, the share of organized retail in total retail grew, although slowly, from 3.3 per cent in 2003-04 to 4.1 per cent in 2006-07. Food and grocery constitutes the bulk of Indian retailing and its share was about two thirds in 2003-04 gradually falling to about 60 per cent in 2006-07 (Table 2.5). The next in importance is clothing and footwear, the share of which has been about 7 per cent in 2003-04 and rose to 9 per cent in 2006-07. The third biggest category is non-institutional healthcare whose share has slowly reduced from 9 per cent in 2003-04 to 8 per cent in 2006-07. The next is furniture, furnishing, appliances and services, whose share rose from about 5 per cent in 2003-04 to 7 per cent in 2006-07. The category of jewellery, watches, etc. constituted about 6 per cent of total Indian retailing in 2006-07, rising from 5 per cent in 2003-04.

India Retail - Share of Categories (per cent)

FOOD & GROCERY BEWERAGES CLOTHING & FOOTWEAR FURNITURE, FURNISHING,

2003

2004

2005

2006-

-04 66.4 2 7.3 4.8

-05 62.5 2.7 8.8 5.8

-06 61.7 3.1 8.6 6.2

07 59.6 3.6 9.3 6.8

128

APPLIANCES & SERVICES NON INSTITUTIONAL HEALTHCARE SPORTS GOODS,

9

8.6

8.5

8

2 3.5 5 100

2.4 3.8 5.4 100

2.6 3.9 5.4 100

2.7 4.2 5.9 100

ENTERTAINMENT EQUIPMENTS & BOOKS PERSONAL CARE JEWELLERY, WATCHES etc.

TOTAL RETAIL

Source: Computed from Technopak Advisers Pvt. Ltd. data.

While the overall share of organized retailing remains low, its share in certain categories is relatively high and in certain other categories quite low. Thus, for clothing and footwear, the share is already in the range of 19-22 per cent, for the category of sports goods, entertainment, equipment and books the share is 12-16 per cent, and for furniture, furnishing, appliances and services, the share is 10-13 per cent (Table 2.6). In contrast, the share of organized sector in the largest category of food and grocery retailing, although growing, remains just below one per cent.

Share of Organized Sector in Total Retail by Category (%) 2003

2004

2005

2006-

-04 0.5 5 21.6

-05 0.6 3.8 19

-06 0.7 3.6 20.4

07

APPLIANCES & SERVICES NON INSTITUTIONAL

13

11.4

11.3

10.2

HEALTHCARE SPORTS GOODS,

1.5

1.7

1.9

2.1

11.6 2.8 3.3 3.3

12.1 3.5 4 3.6

14.4 4.7 5.1 4

16 5.4 5.6 4.1

FOOD & GROCERY BEWERAGES CLOTHING & FOOTWEAR FURNITURE, FURNISHING,

0.7 3.1 18.5

ENTERTAINMENT EQUIPMENTS & BOOKS PERSONAL CARE JEWELLERY, WATCHES etc.

TOTAL RETAIL

129

Source: Computed from Technopak Advisers Pvt. Ltd. data.

The growth in organized retailing in recent years can also be gauged by the rise of shopping malls as well as the rising number of modern retail formats. In 1999, India had just three shopping malls measuring less than one million sq. ft. By the end of 2006, the country had 137 shopping malls equivalent to 28 million sq. ft.

The pace of construction of shopping malls is progressing rapidly and the number of malls is expected to be about 479 by the end of 2008 with a capacity of 126 million sq. ft. (ICICI Property Services-Technopak Advisers Pvt. Ltd., 2007).

Expansion of Organized Retail by Format The total number of organized retail outlets rose from 3,125 covering an area of 3.3 million sq. ft. in 2001 to 27,076 with an area of 31 million sq. ft. in 2006.

Small-sized single-category speciality stores dominated the organized retail in the beginning with almost two-thirds of total space in 2001. Departmental stores came next with nearly a quarter of total space and supermarkets accounting for the balance of about 12 per cent of organized retail space. There were no hypermarkets in India in 2001. Speciality stores are still the most common modern retail format with over a half of total modern retail space in 2006. Supermarkets and department stores occupied nearly an equal space of 15-16 per cent each in 2006. In 2006, India had about 75 large-sized hypermarkets carrying a tenth of the total modern retail space in the country. This format is expected to gain more prominence in the future.

Regulatory Framework There had been no specific restrictions on the entry of foreign retailers into the Indian market till 1996. A few foreign players were granted permission for retailing under this earlier regime. However, in 1997 it was decided to prohibit FDI in retailing into 12 the country. In January 2006, however, a partial liberalization took place in policy in which foreign companies are allowed to own up to 51 per cent in single-brand retail JVs as approved by the Foreign Investment 130

Promotion Board (FIPB). Besides this, foreign companies are allowed in wholesale cash-and-carry business and export trading with 100 per cent equity through the automatic route. Foreign companies with 100 per cent equity can also carry out trading of items sourced from the small-scale sector and do test marketing of products for which the company has a manufacturing approval under the FIPB route. With regard to domestic regulation, the organized retailer has to secure a number of licenses and clearances from various central, state, and local authorities before it starts its operations. They are related to operations, infrastructure, labour, taxation and other general matters. The number of licenses varies from state to state and it also depends on the type of store format. First, a retailer has to obtain a trade license from the local authority (municipal corporation, municipality, or panchayat) which grants permission to carry on the retail business. It has also to obtain licenses from the Agricultural Produce Marketing Committees (APMCs) of each state for procurement and sale of fruit, vegetables, and staples within the respective market areas (mandis) of each APMC. A detailed general list of required clearances is given in Annex 3. In addition, in case a new building or mall is to be constructed for use in retailing, the organized retailer has to obtain “no objection certificates” (NOCs) from the different state authorities in charge of traffic, electricity, water, fire and pollution control.

Zoning restrictions are also applicable to the organized retail outlets which can be set up only on land earmarked for the local authority for commercial establishments.

Evolution of International Retail: Implications for India The focus of this chapter is the retail dimension of the profound and rapid transformation of the food industry in developing countries—a key element of globalization—and its relevance to India.8 A “supermarket revolution” has indeed occurred in developing countries since the early-to-mid-1990s. In many countries, supermarkets have gone well beyond the initial middle-class clientele to penetrate the food markets of the poor. This “shock” downstream in the food system has made an impact on traditional retailers; has set off ripple effects upstream in the 131

food system, on the wholesale, processing, and farm sectors; and has incipient effects on trade. This chapter reports on the experiences of developing countries mainly elsewhere in Asia and in Latin America and Eastern Europe with respect to the supermarket revolution and strategic policy approaches taken in developing countries. We also touch on the most relevant experiences of developed countries.

Section 3.2 discusses trends in the spread of supermarkets, with a brief comparative look at the US experience (interestingly, in many ways the most relevant of the developed-country experiences for India) and then in developing countries. Section 3.3 analyzes the determinants of the diffusion of supermarkets in developing countries. Section 3.4 examines emerging evidence of the impacts on consumers and traditional retailers (downstream in the agrifood system) and on processors, wholesalers, and farmers (upstream in the system). Section 3.5 discusses policy and programme measures taken by government and nongovernment entities to promote “competitiveness with inclusiveness” among the various actors in the food system confronting the opportunities and challenges of the supermarket revolution. Section 3.6 concludes with lessons for India.

Throughout the chapter, the authors use the term supermarkets as shorthand for the various segments of modern retail, and we distinguish the segments (hypermarkets and superstores, supermarkets and neighbourhood stores, convenience and forecourt stores, and discount and club stores) only when necessary.

The Spread of Supermarkets Supermarkets started in the United States in the 1920s and 1930s and became dominant in the late 1950s. The traditional food retail system that dominated the country before supermarkets looked in essence the same as India’s traditional retail system. It consisted of (a) wet-markets (similar to those in Asia, with many small stalls) for fresh produce, fish, and meats; (b) tiny “mom and pop” stores (man at the till taking orders, wife pulling down products from little shelves and measuring out and packing orders) with no self-service by customers; (c) street 132

hawkers with pushcarts or shoulder or head burdens; and (d) home delivery of milk and mobile (cart) delivery of dry goods—for example, by the famous Jewel Tea Company horse carts. Today, however, supermarkets have about 80 per cent of food retail in the United States. The advent of modern retail (i.e., chain stores) started in the late 1870s, long before the supermarket format emerged as large self-service stores in the 1930s. Several important trends in the development of modern retail over the past 130 years might interest Indian readers.

Three key demand-side socio-economic changes occurred over a century. First, the United States was mainly rural in 1900 (the urban share was 40 per cent) and mainly urban by 1990 (urban share, 75 per cent). Second, few American women worked outside the home in 1900, and even by 1970 only 15 per cent of married women were counted among the national workforce. A massive societal change occurred in just a few decades, and by 2000 the share of working women was 75 per cent. Third, incomes per capita increased substantially over the century. All three changes are taking place in India today, except they are happening much faster than they did in the United States. Modern retail started with chains of stores that were about the size of kirana stores. Called “five and dime” or “five and ten cent” stores, they bought nonfood goods in volume and sold at discount.

They further cut costs by moving to self-service. These chain stores were an innovation of the tiny shop owners. As a major format, they lasted into the 1950s.

The most famous example was Woolworths, started in the 1870s in big cities in the boom zones. From one tiny store in 1878, a chain was born that built to the first global retail multinational of medium-sized nonfood shops, with 2,866 stores in five countries (including the United Kingdom) 50 years later.

The non-food five-and-dime stores acted as an “idea spark” model for chain-store formation by food stores that were formerly just small stand-alone grocery shops.

The owner of a little tea shop (selling the ingredients for the main beverage of the day) got an idea in 1878 to build a chain of stores in big cities in boom zones and buy tea directly from Chinese plantations to cut the cost and beat the competition.

That chain was A&P. From selling just tea in the 1870s, it grew to a grocery store format (dry foods) that opened as the first A&P Economy Store, the same size as a “neighbourhood store” format in India today, and focused on oils, packaged foods, 133

soap, and so on. A&P procured in large volumes, drove down costs, and standardized store layouts. By 1915 the chain comprised 1,600 stores, and by 1925 it had 13,961 stores; in the early 1930s, A&P was operating approximately 16,000 stores with combined revenue of US$1 billion (equivalent to US$10 billion in 2000 dollars).

In 1936, A&P opened its first “supermarket� (just a few times larger than a neighbourhood store). By 1950, A&P ranked second in sales in the world (after General Motors). In the mid-1950s, A&P was by far the number one food retailer and had moved from small-to-medium-sized supermarkets. However, by 2000, A&P had become a minor chain because its retailing and procurement strategic positioning had not kept up with chains that arose in the 1970s and 1980s, like Wal-Mart. Sam Walton is an important example of a kirana man who used entrepreneurial spirit in a situation of opportunity. He started in 1950 with a tiny five-and-dime store in a rural Arkansas village with a population of 3,000. It was one of the most underdeveloped regions of the United States, bypassed by the boom development of the past 100 years. Walton started by building a chain of kirana stores in the surrounding towns and then states, and by 1962 he had decided to open a small supermarket called Wal-Mart. He hit on an idea to buy directly from suppliers and cut costs by building a distribution centre network.

While other chains had started in big cities in boom zones, Walton focused his effort on villages and small towns, considered an impossible strategy at the time.

Walton opened large-format discount stores (big supermarkets with cheap nonfood items and dry foods) in the 1970s. In the late 1990s, he added small-format neighbourhood stores. Wal-Mart grew from two kirana employees in 1950 to 1,500 in 1970, 21,000 in 1980, 200,000 in 1987, and 1,140,000 in 1999. By 2002, Wal-Mart had become the largest private employer in the world, with 2 million employees. The company’s annual revenue totalled US$350 billion in 2006.

Several trends characterized the development of chain stores over the past century in the United States, with similar trends seen in the United Kingdom and France.

The salient features were the following:

134

1. The trend was from non-food chains to dry-food chains to full-line chains offering fresh foods. Supermarkets did not sell much fresh produce until the 1960s because it was considered impossible to move beyond the American tradition of buying in wet-markets and tiny fruit shops.

2. The trend was from clerk service to self-service.

3. The format trend was from the traditional system described earlier to chain nonfood shops, to chain grocery shops, to small supermarkets and food sections in department stores, to medium and large supermarkets in towns, to hypermarkets in the suburbs, to convenience stores and neighbourhood stores in dense inner-city areas and small towns.

4. The trend was from large cities and economic boom areas to second- and thirdtier cities and second-tier areas and to suburban areas when those developed in the 1950s. Wal-Mart’s development in the opposite direction was a clear exception.

5. Individual chains and the overall supermarket sector underwent massive growth over seven decades, and that growth cycle eclipsed an earlier cycle of growth in self-service chain grocery stores.

6. Chain stores mimicking and then improving on the credit system that the small traditional shops had used for customers by developing credit cards, loyalty cards, and banking services. They also took on other services, such as health clinics and banks for poor consumers.

7. Chain stores modernized their procurement systems. Woolworths and A&P had historically focused on cutting costs through bulk buying, self-service, and in inventory handling. As competition increased, the importance of modern logistics and cost cutting intensified, and from the 1990s onwards, those strategies took centre stage.

The remaining traditional retail sector (now about 20 per cent of food retail) was in reality mainly a modernized small-shop sector. In remote areas, some small 135

traditional groceries survive, but the mainstream is speciality shops (defendable niches) that are far more modern and upgraded than the general-line mom and pop store of years gone by. Also, many small stores themselves started chains (as previously noted) or became franchisees of larger chains.

Apart from a few cases, such as A&P into the 1960s and then Krogers and WalMart today, most supermarket chains were regional rather than national. The trend, however, is toward establishing national-level chains and catching up with Europe on consolidation. It is important to keep in mind that the United States has a history of the strongest and longest anti-supermarket regulatory history of any country in the world. Wrigley and Lowe (2002) concluded that the body of stiff regulations and competition laws enacted in the United States resulted in a significantly slower spread of supermarkets and national-level concentration from the 1930s to the 1980s than the United Kingdom experienced. This reversed first in the 1950s and then again in the 1980s. However, the result over the decades is similar to what happened in the United Kingdom (which had far laxer regulation of supermarkets). This suggests that underlying economic and social forces moved the modern retail sector toward dominance and concentration over time, whereas regulations mainly affected the transitional path.

As will become apparent later in the chapter, in many of their broad lines, the trends in the spread of supermarkets in developing countries and the evolution of their procurement systems bear many similarities to the recent experience of the United States; Western Europe and Japan had broadly similar experiences in the rise of supermarkets. This suggests that the economic logic of the retail transformation is shared across regions, starting from a surprisingly similar shared tradition of traditional retail systems. The main difference between the retail transformations in developing countries and in the United States and Western European is the extreme speed with which it is occurring in developing countries.

Supermarkets in Developing Countries Supermarkets have been around for half a century in several developing countries, but the phenomenon was limited mainly to large cities, upper-middle-class or rich consumer segments, and domestic capital chains. In contrast, a supermarket 136

revolution in developing countries took off in the early-to-mid-1990s. The patterns and determinants of that revolution are detailed in the following subsection.

Promotion Partially Counterbalanced by Regulations on Modern Retail Developing countries also have a tradition of imposing policies controlling the development of supermarkets. However, the regulation and constraint on modern retail in developing countries today appears to be far less than was historically the case in, for example, the United States. Governments in developing countries may limit to some degree the power of modern\ retailers by restricting the locations (through zoning regulations) and hours (and thus convenience for consumers) of supermarkets. These limitations may be imposed to protect traditional retailers or to level the playing field between domestic and foreign modern retailers.

Historically, such regulations were common in Western Europe and the United States. The regulations are also a response to traditional retailers’ concern that modern retailers have advantages in competition that need to be counterbalanced by regulation. Hypermarkets are often associated in the popular view with foreign chains, low prices, and competition with small stores. Thailand and Malaysia have regulations targeting hypermarkets.

The intensity of the policies in these “strong regulator” countries has varied considerably over the past five years (the emergent-regulation period). For example, in Thailand, such regulation first arose in 2003, relaxed in 2004–2005, and re-emerged in 2006. Malaysia also experienced fluctuation in its regulation of supermarkets, first seeing a rise and then a relaxation (CIES Food Business Forum 2006a, 2006b, 2006c). This mirrors a similar regulatory fluctuation in the United States, although there it was a slow up and down motion lasting 80 years, while in Southeast Asia it has been a wildly dipping and rising roller coaster over less than a decade.

The evidence is mixed as to the impacts of regulations on modern retail diffusion.

The key reason is that modern retail chains are very flexible and malleable in terms of company structure and store format. For example, if a regulation is 137

imposed on hypermarkets, a chain can easily continue expansion with smallformat stores, as Carrefour and Tesco are doing in Thailand today. In the popular imagination, “modern retail” means “big box,” but in fact a modern retail chain can be a chain of kiosks, convenience stores, neighbourhood markets, supermarkets, hypermarkets, and even a mail order outlets. Moreover, regulations are often debated for months or even years before becoming effective, and chains usually accelerate their expansion before the regulations are implemented. That rush of new stores often changes the “policy mood” in municipalities and provinces that receive new stores and watch suppliers sign up and consumers queue up.

Implications for India The organized retail in food and grocery segment in India is growing fast, although the exact numbers on its growth differ widely (16–50 per cent) depending on the source and definition being used. The growth rates projected by Planet Retail for the next five years indicate that the growth in organized food retail is likely to be accelerating, and it may turn out to be akin to the information technology revolution but so far has been well rooted in domestic demand and domestic capital.

The current and projected growth rates in organized food retail are quite high, albeit from a very small base. Organized retail in all commodities constitutes about 4 per cent of total retail, while in the food and grocery segment the ratio is less than one per cent. Notwithstanding this small share, if these high growth rates continue, or accelerate further, it might not be long—say, by 2015—before the share of organized retail in food and grocery segment accounts for at least 15–20 per cent; by then it would start having some noticeable impact not only on unorganized retail in food but all along the food supply chain. As the share of organized retail increases, the sector is likely to experience major consolidation, with large retailers and processors taking over smaller players or joining hands with other large retailers to exploit greater economies of scale. In 2007, Reliance took over Adani Retail in Gujarat; and Trinethra stores were bought by the retail segment of the AV Birla group under the banner More. Also, Mumbai-based 138

Spinach retail stores took over Delhi’s Sabka Bazaar and Home Store. Recently, media reported Bharti is likely to take over Big Apple, which started in 2005 and now has 65 stores covering an area of more than 100,000 sq. ft.

Since the story is just unfolding in India, it would be useful to draw some lessons from the experience of other countries that are way ahead on this path and then manage this change to the best advantage of most of the stakeholders in the supply chain. There are several key stakeholders in the supply chain, if we look at it from “plate to plough� in a demand-driven, consumer-dominated transformation: the consumers, retailers, processors, wholesalers, commission agents, logistics people, and primary producers (farmers). Extending this supply chain brings in input dealers, bankers, insurance companies, and others that support the supply chain in numerous ways.

As organized retail grows and occupies a larger space, almost all the stakeholders in the supply chain are likely to be affected, some less and some more, some favourably and some adversely. This happens in any major structural transformation. Normally, stakeholders who experience gains quietly support the change, while those who lose try to either stop the change or adapt their own situation in such a way that they can minimize the losses. For the policymaker, this is often a complex and difficult situation. But then the art of successful policymaking is minimizing the negative impact and, if possible, compensating the losers, while maximizing the gains for majority of stakeholders and even taxing them marginally to generate resources to compensate the losers or assist them in acquiring other jobs or opening other businesses.

The following discussion concentrates primarily on three major stakeholders: the consumers, traditional retailers, and farmers. The reason for this focus is that the numbers of these three stakeholders in society are very large, and in a democratic society like India, these numbers exert influence through the ballot box. Thus, policymakers cannot ignore it while managing change. However, before one looks at the likely impact on these three major stakeholders, it might be worth looking at their basic structural characteristics and how they are likely to change.

139

Enhanced Welfare Gains for Consumers On average in 2004, Indian consumers spent about 51 per cent of their total expenditure on food; in rural areas, that figure was about 55 per cent and in urban areas it was 42 per cent according to the National Sample Survey (Planning Commission 2004). Although India has a large rising middle class, its income levels are much lower than those in developed countries. Most Indians are very price sensitive. Any pressure on prices, especially for food, gets the immediate attention of policymakers. For example, the onion crisis in the summer of 1998 paved the way for the exit of the ruling government at that time (Desai 1999). In 2007, inflation crossed the 6 per cent mark, triggering a series of inflationcontrolling policy changes spearheaded by food price controls. The lesson seems clear: any relief in food prices makes consumers happy. However, policymakers need to remember that policies to rein in inflation should not conflict with the interests of other major stakeholders in the economy, especially producers (farmers). If falling prices for food are achieved by making transportation, logistics, and procurement more efficient (e.g., by better planning), then both producers and consumers benefit. However, reducing consumer prices by suppressing prices for producers could lead to a conflict, and policymakers would have to make difficult policy choices.

The emergence of organized retail undoubtedly gives consumers a wider choice of goods, more convenience, and a better shopping environment, among other benefits. This is feasible because organized retail can take several formats, from small neighbourhood stores in densely populated cities with high real estate prices to large air-conditioned malls in the periphery where real estate is cheaper.

Organized retail can appear small but spread in all local markets, providing the convenience of a neighbourhood kirana store but with procurement on a mass scale that keeps prices low and provides greater variety. With a reasonably long history of organized retail, the United States has shown that many organized retailers have been able to hold retail prices down, especially for massconsumption goods. Fishman (2006) shows that retailers like Wal-Mart have held the US inflation rate down by at least one percentage point (normal inflation hovers around 2–4 per cent). The success of such retailers to hold the price line 140

comes largely from their efficient national and global sourcing and scale economies. In India, given a very large price-sensitive population, holding the price line for a large mass of consumers could be a great boon to consumer welfare.

However, that boon is not likely to happen overnight. Organized retailers tend to start off from first-tier cities with high purchasing power and then go to secondand thirdtier cities with more price-sensitive populations. Several chains in India have started in cities like Hyderabad and Bangalore, which are prospering from the information technology boom, to the metropolitan cities of Delhi, Mumbai, Chennai, and Kolkata, and then very quickly moving to smaller cities like Jaipur and Chandigarh. Some chains have announced plans to start business hubs in rural areas. DSCL's Haryali Kisan Bazaars, Mahindra and Mahindra's Shubh Labh Stores, Tata/Rallis’s Kisan Kendras, Escort’s rural stores, and ITC-led Choupal Sagars are similar business hubs that provide value-added services, such as credit services, soil-testing facilities, education services, and agri-input supply to village farmers. In many countries, it takes decades for retail to extend into rural areas. In India, however, it appears that organized retailers are moving very fast in all cities and in all product segments (except meat and meat products). The expected benefits of that expansion are lower consumer prices for the same quality, wider variety, and a better shopping experience.

These benefits should soon percolate to the mass of Indian consumers, assuming that organized retailers have free access to global- and pan-Indian sourcing directly through producers, processors, and specialized agents.

Another interesting point to note in this connection is that several surveys such as the Indonesian consumer study noted above on consumer behaviour with respect to modern retailing show that consumers prefer organized retailers for their better hygienic environment, indicating a concern for food safety. Although it is difficult to implement any food safety standards in the traditional retailing environment, modern organized retailers could be thought of as an entry point to ensure food safety, not only at the retail end but also all along the supply chain. Large retailers could be encouraged to guard their supply lines and provide extension and support to ensure traceability in production and that food moves from farm to plate in a 141

hygienic environment. This would be an additional gain to consumers, enhancing their welfare. Almost all the convenience and neighbourhood stores launched by modern retailers cater not to high-end consumers primarily but to middle- and lower-income groups.

These consumers are attracted to low, discounted price offers. The “Everyday low prices” and “Saving is my right” slogans of the Subhiksha chain have been instrumental in wooing customers and thus escalating the growth of daily footfalls. In 2007, Safal, the largest organized retail network of fruit and vegetables in India under Mother Dairy, reduced the prices of 13 selected winter vegetables to Rs 5 per kilogramme. That price was lower than the prices offered

by Reliance Fresh for many of the items and 50 per cent cheaper than those offered by local vendors. The underlying idea was to give better prices to both farmers and consumers and reduce the gap between the two prices. This shows that the entry of more players will induce sufficient competition and price wars that will eventually help consumers at the front end and possibly farmers at the back end.

Upgraded and Co-opted Kirana Stores and Hawkers What about the kirana stores? The political debate in India today is hung up precisely on this point. Traditional retailers (kirana stores, street hawkers, and wet-market stall operators) occupy an overwhelmingly large space in Indian food retail; almost 99 per cent of food and grocery being sold in this country is through traditional retailers.

Therefore, what happens to their livelihood as modern retail expands is a legitimate concern that every policymaker must recognize. Experience in China and Indonesia shows that traditional and modern retail can coexist and grow, albeit at different rates, for many years, usually decades. While the kirana stores may be growing at about 2–5 per cent or so, organized retail may be growing at 20–40 per cent plus. In Indonesia, even after several years of the emergence of supermarkets, 90 per cent of fresh food and 70 per cent of all food is still controlled by traditional retailers. In China, the overall story is not very different, 142

although supermarkets have moved faster into cities. Organized retail starts capturing an increasing share of the total retail in food and grocery, although in absolute terms both organized and traditional retail may be growing. However, structural changes in retail will surely start affecting large numbers of small retailers at some stage, be it after one or two decades, especially when the overall share of organized retail in food reaches about 25–30 per cent. It may be such that the kirana traders operating at the periphery of the organized sector are the first ones to bear the brunt of its rapid expansion. These traders might lose their businesses to the organized sector relatively early, while the small and marginal traders farther away from the supermarkets continue to survive and flourish. India is likely to reach this stage in the next 10 years or so, provided the growth rates in organized retail remain as they are today or even accelerate under a more benign policy environment. Thus, India has a lead time in which to innovate for greater inclusiveness and train the small players to be a part of the retail revolution.

India can also learn from neighbouring countries of Southeast Asia in this regard.

As discussed in Section 3.5, Singapore, Taiwan, and Hong Kong had programmes to upgrade traditional retailers to compete with organized retailers, and those who could not be brought up to that level were given grants to find new jobs.

India has several options with which it can experiment. It is important to remember that organized retail is not just about big-box malls but is also about neighbourhood stores (as shown by Subhiksha and Reliance) and even push-carts.

Many dairy and ice cream companies (e.g., Mother Dairy, HUL-owned Kwality Walls, Vadilall, etc.) are organizing push-carts, and ITC has been considering using push-carts organized through a nongovernmental organization or push-cart vendor association that can organize them and infuse some capital through microfinancing. In early 2007, ITC went ahead to launch as many as 300 push-carts in Hyderabad and Secunderabad in Andhra Pradesh and were in talks with the Municipal Corporation of Hyderabad (Business Line 2007). This could help small roadside vendors develop a brand image and charge better prices for quality products. Another retail format that has gained popularity are exclusive booths and dairy parlours. For instance, Mother Dairy conducts its retail sales of milk and milk products through exclusive milk booths. Amul, the retail brand of GCMMF, 143

has already launched about 200 outlets, mostly in Gujarat, selling all products under the brand GCMMF, including milk and ice cream.

It proposed to expand the pilot project and set up 10,000 outlets across the country (Bose 2005). Organized retailers can: (i) co-opt several kirana stores and hawkers drawn from the pool of traditional retailers; (ii) upgrade them with adequate infusions of capital, design, and training to enable them to better meet the demands of customers; and (iii)\ organize them under their respective banners through franchises, partnerships, or even employees. That is being done in Japan, where big retailers are co-opting convenience stores and upgrading them under their franchise models. In the fast-food industry, McDonald’s now runs more than 30,000 restaurants worldwide (although the company has not yet offered franchises in India). In India, Nirula’s followed a similar pattern, though on a much smaller scale. The franchise model can also be successful Sin organized retail, with some outlets directly under company ownership and others under franchise. This can make the chain competitive as well as inclusive. In India, the government as well as industry associations like the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII) are confronting the challenge of incorporating traditional retailers in the modern retail movement. Even civil society could join this revolution to ensure that it benefits most stakeholders in the economy. This would require not only innovative ideas but also significant resources. Interestingly, as the share of organized retail grows, the Indian government is likely to realize a major gain in terms of tax revenues, because it would be much easier to collect sales taxes from organized retailers than from traditional retailers. Tax revenues can be ploughed back into the system to upgrade traditional retailers and improve the wholesale wet-markets, as China is doing under the 2006-launched 200 Markets Upgrading Programme.

Gains for Farmers The experiences of other countries with longer histories of organized retail reveal that processed food generally occupies the largest share of retail (roughly 65 per cent), followed by semi-processed food (about 20 per cent), and fresh food (about 144

15 per cent). Although direct links between organized retailers and farmers are possible only for fresh food, many farmers are likely to gain from links to processors, because processors work closely with modern retailers. A study commissioned by the World Bank reveals that the export non-competitiveness of India’s horticulture produce is a result of its weak supply chain (Mattoo et al.

2007). The study shows that the average price that the farmer receives for a typical horticulture product is only 12–15 per cent of the price the consumer pays at a retail outlet. Over time, processors and retailers will become interdependent and even compete for their margins. However, processors will be the first to absorb the consumer preferences emanating from organized retailers, and those preferences need to be communicated to the primary producers (farmers). It would therefore be interesting to see how links emerge between processors and farmers for processed food, and between retailers and farmers for fresh food, through several institutional frameworks ranging from co-operatives to contract farming to corporate farming. Each link will have a different impact on farmers. Unlike in the past, when most of the firms entering retail restricted themselves to marketing contracts (direct buying and selling at a contracted price), the recent trend is to forge both forward and backward links with the farmers. In India, private retailers and processors have linked with farmers directly. One notable example is Nestle, a major multinational operating in the dairy sector that started its operations in 1961 with just 180 farmers and by 2006 had linked with more than 98,000 farmers (Nestle India Limited 2006). India has a history of dairy co-operatives tying up with a large number of small and marginal farmers and thereby linking farmers with the markets. These trends are emerging in contract farming arrangements in fresh fruit and vegetables and in the poultry sector.

Understanding how organized retail can affect production on the farm requires imagining the process from plate to plough, or from retail to tail (farming). In the emerging Indian economy, consumers will be the focus as supply bottlenecks are removed and competition builds up in each sector. Organized retailers are the first to interface with consumers buying in the organized channels, and they can effectively communicate consumers’ preferences back to the producers (processors and farmers) in terms of quantity, quality (including food safety), and other specific traits of various commodities. By contrast, traditional retail, 145

working fadelessly through the wholesale market, is not in direct communication and interface with the farmers in the fresh domain or with the processors in the processed domain. This market information itself is critical for producers to mitigate their market risk and encourage investments.

Moreover, quality-differentiating investments are not rewarded without an organized retail end. To a certain extent, the gains to the farmers are weighed in terms of the profits they earn. Most IFPRI studies in India confirm that contract farmers earn higher profits than non-contract farmers, and this is primarily achieved by lowering marketing and transaction costs and, in some cases, offering better prices. An IFPRI study of Mother Dairy, Nestle, and Venkateshwara Hatcheries showed that contracting is beneficial because it helps farmers cut the cost of cultivation and earn higher profits compared with non-contract farmers (Birthal et al. 2006). The summary results from the study show that the net profit for the contract dairy farmers was more than double that of non-contract farmers, 78 per cent higher for vegetable farmers, and 13 per cent higher for poultry farmers. Production costs for contract farmers were less than those for noncontract farmers by approximately 21 per cent for milk and 21 per cent for vegetables. This can be attributed to the lower share of transaction and marketing costs. Another IFPRI study of dairy co-operatives shows that contract farmers earn higher profits compared with non-contract farmers (Gupta et al. 2006). In the case of Milkfed, contract farmers earned 33 per cent higher net profits per ton of milk sold than did non-Milkfed farmers. Similarly, an IFPRI study of Mahagrapes showed that the annual profits earned per acre by the contract growers were nearly 38 per cent higher than those of the non-contract growers. Because Mahagrapes caters to global markets, the price farmers received was almost three times higher than what they could have received in the local markets. The farmer members also received better-quality and cheaper inputs and extension services.

This process of backward integration can be strengthened and expedited if retailers or their specialized procurement agencies not only connect with producers (farmer organizations and processing companies) for their output but also help them, especially farmers, by providing critical inputs, such as technical expertise, extension, finance, and insurance, which are scarce or nonexistent in the 146

public support systems accessed by most farmers. Given the scale on which organized retailers operate, they can bring in banking, insurance, and other services through specialized agencies. In Section 5, we presented several examples of this being done in many countries encouraged by their respective governments through better policy environments and more resources pumped in from the government kitty. Access to government funds would release credit constraints and also cover production risks as farmers move from low to high value agriculture. A surge in access to inputs would empower farmers to modernize and become more competitive both in national and international markets. Supplying to supermarkets can thus be a springboard for exports even by small-to-medium- sized farmers. China, Mexico, and many other countries are already doing this and provide India with valuable examples from which to learn.

Given the size of the demand among organized retailers, or among processors supplying to organized retailers, it is very difficult for farmers, especially those small holdings, to enter into agreements or contracts with retailers or processors.

By clustering in groups of viable size, farmers can match their supplies with the type and size of demand among organized retailers and large processors. But who can handle this organizational challenge?

In many countries, the key to meeting the challenge has been government support.

One example from India is Mother Dairy in the 1970s. Although the chain was under a sort of co-operative network, duly supported by the National Dairy Development Board (NDDB) in terms of “cheap� capital and preferential allocation of land for its booths in Delhi, the key to Mother Dairy’s success was that it rolled out the front end (neighbourhood milk booths) in Delhi, Bangalore, and other cities and formed several co-operatives of producers, thereby linking the two through processing units. The processing units procured milk from cooperatives of farmers from remote areas, chilled and homogenized the milk, and by next day put it in the booths all over Delhi and other cities.

This helped farmers by giving them an assured market (while the traditional market was risky and fluctuating) and induced more investments in the milk sector. Today India is the largest producer of milk, in part because of the 147

productivity increases resulting from the NDDB scheme. However, much potential is yet to be realized because less than 20 per cent of that productivity passes through the organized sector.

Similar things can happen under private ownership of retail and for various commodity chains (e.g., tomatoes, mangoes, and poultry). This has happened in several developing countries, including Chile, Brazil, China, and Indonesia. The backward integration of large retailers can take several forms: directly through farmers’ organizations, through “lead” farmers, through specialized agencies, or through processors. However, the front end of organized retail must be big enough to necessitate large procurements and thus able to pay for the price premiums that reward consistency and quality differentiation. Once organized retail reaches a critical level of about 20–30 per cent of total retail, its impact on modernizing the wholesale markets and logistics and on providing necessary inputs to farmers would become visible.

Thus, overall, it appears that society as a whole is likely to gain from the emerging structural transformation in retail trade. The gains will accrue early to consumers and a little later to farmers. However, to ensure that traditional retailers do not become losers in this revolution, innovation is needed to co-opt those who can be competitive and help others to make a transition to other jobs, as several Southeast and East Asian countries have done (see Section 3.5 for details). This innovation will help modernize the entire agricultural system, promote its efficiency, and make it more competitive for growth and income augmentation all along the value chain. The time for such innovation in India is now, with consumer and investor confidence high and foreign exchange funds sufficient to modernize its economy within a short period.

Each country has done this in its own way. Section 3.5 presents examples from Singapore, Taiwan, China, and other countries that have tried to attain competitiveness with inclusiveness. India will have to find its own version of successful innovation in retail trade.

As it stands today, the policy environment is not very conducive to the promotion of organized retailing and processing led by private players in India. The agri148

retail venture Reliance Fresh, led by Reliance, suffered a major setback in Uttar Pradesh when the government asked it to pull out of the state in August 2007.

Reliance was thus forced to rethink major investment plans and expansion of retail stores in the state. However, according to recent media reports, the Uttar Pradesh government has turned around and expressed its willingness to allow private retailers in the state. The government is keen to ensure that these agribusiness ventures create employment opportunities and also take care of the people displaced in the process (Financial Express 2007). Reliance, which had initially earmarked Rs 250 billion (more than US$6 billion) for its retail venture, has slowed down its pace in states like West Bengal to avoid a similar backlash.

Apprehensions about large retailers displacing small retailers have resulted in farmer’s coming together to establish farmers’ malls.

According to media reports, farmers in Pune are planning to take on big retailers and sell their produce directly to the consumers. It will be interesting to observe how the government responds to these initiatives and helps organized retail spread its roots.

Organized retail is in its infancy in India but developing fast. The next 5 to 10 years are critical for its scaling up to have a visible impact on the backend operations of retailers. Government and business need to work together to ensure that this opportunity is not lost but is used in a manner that benefits most stakeholders in the chain from retail to tail. This can be done when the government establishes and follows policies for the continued growth of modern retail, and uses tax revenues collected from organized retailers to build infrastructure in commodity chains that helps farmers, wholesalers, and traditional retailers, as well as the procurement activities of modern retail itself. Each commodity chain is unique and needs careful assessment by both business and government. The transition to organized retail can be made more inclusive by bringing farmers and traditional retailers into the mainstream of this structural change, without sacrificing the efficiency of the value chains.

149

The failure to achieve this transition, however, will keep the value chains trapped in low levels of efficiency. They will continue to give lower prices to farmers and charge higher prices to consumers, not reward quality, not meet food safety standards, and so on. The only winners in such a system may be a handful of commission agents.

However, as India liberalizes its trade, domestic unorganized value chains face global competition and will not be able to sustain their existence for long in the face of it. The total collapse of numerous value chains would create much greater pains than would the gradual transition to modernized and efficient retail chains.

For example, when India introduced computers in banks, railways, and other businesses during the mid-1980s, employees went on strike for days to stop it, fearing computers would lead to massive unemployment. Twenty years later, one can only smile at the naivetÊ of those opposing computerization; in 2006–2007, export earnings from software and information technology alone exceeded US$30 billion. Organized retail is likely to have a similar experience.

The Indian retail sector is highly fragmented, consisting predominantly of small, independent, owner-managed shops. The domestic organized retail industry is at a nascent stage. At the macro level factors such as rising disposable income, dominance of the younger population in spending, urbanization, shift of the traditional family structure towards the nuclear family are buttressing the organized retail growth in India. Being considered as a sunrise sector of the economy, several large business houses are entering the retail industry under multiple modern retail formats. On the one hand, the advancement of information technology is improving end-to-end business processing by integrating the entire value chain, backward and forward, for operational efficiencies. On the other hand, rising real estate prices, infrastructure constraints, and expensive technology are making the retail industry capital intensive.

The current regulatory environment is not very conducive to the growth of modern retail in India. The Government of India (GOI) prohibits FDI in retail except for single-brand JVs with up to 51 per cent equity share. The recent growth of the 150

retail industry is already impacting the commercial real estate sector. As a result of shortage\ of land and rising property prices, finding property in commercial markets is becoming difficult. Further, the land conversion process is complex.

The licensing process for organized retail is cumbersome requiring as many as 33 licensing protocols. Taxes differ from state to state on the movement of goods: for instance, some states levy entry tax; a few levy exit taxes; in some states, the local municipal government also levies octroi. Presently, there is the central sales tax (CST) of 3 per cent on inter-state sales and value added tax (VAT) of 4-12.5 per cent on different products. Besides, the lobby against modern retail is mounting in recent months from traditional retailers.

Nevertheless, the macroeconomic landscape indicates that the domestic retail industry has immense scope for the modern as well as traditional retailers to coexist. Through a balanced regulatory framework and competition policy, both the traditional format and the modern format can continue to grow, eventually closing the gap between the organized and unorganized sectors. Organized retailing will: (i)

promote quality employment;

(ii)

improve business process practices;

(ii)

spur investments in support industries; and

(iv) enable the modernization of the fragmented traditional retail industry.

Modern retail business focuses on maximizing customer footfalls and capturing rising volume and share of the customer wallet. While the competition strategy is largely price focused, the model works by: (i)

improving sourcing efficiencies;

(ii)

expanding product assortment;

(iii)

differentiating service; and

(iii)

enhancing the store ambience. Thus, there are four drivers of modern retail’s “one-stop shopping model� price, product, service, and ambience.

Organized Retail Models

151

High population density in the metropolitan cities and surrounding tier-1 towns is driving the geographic penetration of modern retail. Nationwide, the retail penetration has been the highest in the South in Tamil Nadu, Kerala, Karnataka, and Andhra Pradesh, moving towards the West along Maharashtra and Gujarat and now penetrating the North, in Delhi’s National Capital Region (NCR), Punjab, and Western Uttar Pradesh. The fresh crop of modern retail in the late 1990s started in the southern region as South India has clusters of metro cities and tier-1 towns. In addition, less complicated licensing regulations by the state and local authorities have played an important role in the spatial penetration along the regions. In Andhra Pradesh, the licensing process is now online, thereby reducing the time lag. Broadly, retail firms are following three routes for their market entry: (a) the acquisition route which gives a jump-start to take advantage of the already experienced manpower, infrastructure, front-end property of the acquired firm; (b) the JV partnerships, a preferred route for firms seeking foreign collaboration for technical know-how and assistance in the back-end operations as well as future export opportunities; and (c) the green-field investment route for market entry. A few firms are also following a mixture of acquisition and JV routes for quick market access.

Additionally, firms are strategically expanding verticals by forming subsidiaries or holding firms that act as catalysts to their retail business. Typically, firms are positioning themselves in one or both of the segments: lifestyle and value retailing14 under multiple retail formats. Retail firms are adopting a combination of formats including, mega (hyper and/or super), medium (department and/or speciality), and small size (convenience and/or discount) for expansion. This strategy benefits firms in several ways. It helps to: (i) attain critical mass; (ii) economies of scope in sourcing by accruing costs across stores; and (iii) reach out to consumers in the local neighbourhood locations. Regardless of the route followed, the domestic retail industry is witnessing an increase in domestic investment, technical know-how expertise, improvements in supply chain and logistics, and demand for store brand private labels.

Organized Retail Models Retailer

Segment

Business Strategy 152

Subhiksha

Subhiksha

Low-price

high-volume

strategy: by keeping no fancy frills front-end and by

becoming

an

intermediary at the back end, Subhiksha leverages on discounted prices on bulkMpurchases Trent Limited

Lifestyle &

and cash payments.

Single- brand strategy:

Value

leverages on high margins in

private

labels,

and

targets consumers in socioFuture Group: PRIL

Lifestyle &

economic class B and C. Strategic JVs and

Value

subsidiaries around retail has

enabled

PRIL

to

develop retailing across agegroups, all product categories, the entire customer segments under ITC Choupal

Value

multiple

formats.

Backward

retail

integration

Sagar & Choupal

through IT-based business

Fresh

model:

leverages

by

building direct relationship with the supply source, the farmers, to sell as well as purchase Spencer’s Retail

Value

products

services.

The “duck duckling”

and

and

the

model:

by

having two- or three- value segment stores, backed by 153

a cluster of small-sized Fresh, Daily, and Express stores,

to

leverage

on

economies of scale at back-end value NDDB: Mother

Value

Dairy

chain.

Operates on a co-operative model with the objective of

increasing

welfare.

Has

farmers’ a

trong

presence in Delhi’s NCR region.

Strategically

located in residential areas and follows a low-price strategy

for

fruit

and

vegetables.

In the organized retail one-stop shopping model, Subhiksha distinguishes itself as the “no fancy frills” store working on mass consumers’ daily needs. The company’s business model focuses on high volume and low margin by: (i) keeping small-sized functional stores within the range of 1,000-1,500 sq. ft. area; (ii) clustering in close proximity to each other; and (iii) locating in high population density residential area.

The company concentrates on daily-need essentials and repeat buying nature of its product categories in fruit and vegetables, fast moving consumer goods (FMCG), and medicines. In a typical store in Delhi, the average footfall is around 600- 700 walkins of which approximately 78 per cent turn into bills. Trent differentiates itself by building its own-label route. This strategy allows Trent a better control over the product range, design (value-added portion of the supply chain), and merchandize pricing.

154

The company’s business proposition in building customer relationship through membership programmes and liberal exchange policy has helped Trent in strengthening the Westside brand. The Star India Bazaar caters to the mass-market segments in meeting their regular needs. Although, the footfalls differ from store to store, the average customer footfalls range between 800 and 3,000 a day at a given store. However, Trent claims that their conversion rates are higher by 10-15 per cent per day than other stores. Pantaloon India Retail Limited is the pioneer of India’s modern retail in the hypermarket format and is recognized as an organized multi-format retailer across value and lifestyle segments. The firm’s business strategy is to capture a greater share of the consumer wallet by covering all customer segments in all age-groups, in all product categories through multiple retail formats nationwide. The company’s Big Bazaar (hypermarket chain) cuts across entire customer segments. In a lifestyle store, the average customer footfalls are around 1,000 of which 350 convert into sales transactions. In the value segment, the company attracts an average of approximately 3,000 customer footfalls, of which the sales conversion is between 220 and 250. India Tobacco Company (ITC), leveraged on information-technology, enabled a unique business platform to directly integrate backwards with the source of supply, the farmers.

The company not only optimized efficiencies in the procurement chain for export markets but also created a market place for rural retailing in the domestic market.

Choupal Fresh is a fresh produce wholesale C&C format catering to organized retailers, push-cart vendors, and traditional retailers. These are in operation now only in three cities, namely Hyderabad, Pune, and Chandigarh. They have parallel retail outlets for regular customers. ITC leverages in backward linkages through its expertise in agricultural extension services and strategic partnerships for handling temperature-control technologies and logistics support. By extending agricultural services at the farm level, ITC is managing the quality of the produce and building an ITC brand in fresh fruit and vegetables.

Spencer’s differentiates itself on product quality, assortment of imported food products, and shopping experience. Leveraging on the perception of high-quality imported goods that was attached to the old Spencer’s & Co. brand name, Spencer’s business strategy focuses on an array of food-related products and activities spanning across intercontinental and domestic culinary, and chef 155

demonstrations. Spencer’s follows the “duck and duckling” (pyramidal) strategy for its retail expansion and cost benefits in back-end procurement; it has a small set of destination stores (Spencer’s\ hyper), followed by the supermarket format (Spencer’s Daily), and a larger set of convenient store format (Spencer’s Express and Fresh) located close to the local neighbourhood.

Mother Dairy in Delhi was set up by the National Dairy Development Board (NDDB) under the first phase of Operation Flood Programme in 1974 with the objective of making available liquid milk to city consumers. Following the success of its dairy industry, NDDB established the Mother Dairy Fruit and Vegetable Project in Delhi in 1988. In addition, Mother Dairy also markets dairy products, such as ice creams, flavoured milk, dahi, lassi, mishti doi, ghee, butter, cheese, dairy whitener, Dhara range of edible oils and the Safal range of fresh fruit and vegetables, frozen vegetables and fruit juices at a national level. Mother Dairy sources its entire requirement of liquid milk from dairy co-operatives and sources almost 75-80 per cent of fruit and vegetables from farmers and growers’ associations at the village level. For distributing milk, and fruit and vegetables, Mother Dairy has opened its booths and shops mainly near residential areas of the Delhi NCR region.

In 2006-07, the retail firms mentioned above generated a total sales’ turnover of Rs. 64.72 billion with an average sales per sq. ft. at Rs. 8,298. In addition, these firms’ array of private labels across several product categories has supported sourcing tie-ups with more than 4,124 large and small manufacturers and concessionaires.

In 2006, the firms covered in the case studies (excluding Mother Dairy) consisted of a total of 1,070 stores encompassing nearly 5.3 million sq. ft. area across formats. These firms have projected a cumulative increase to over 6,600 stores by 2010.

156

SWOT ANALYSIS OF WALMART Overview of Indian Retail Sector SIZE •

India is one of the 10 largest retail markets in the world

•

Retail sales were US$262 billion in 2006, constituting over 30% of India’s

GDP •

“Organised Retail” constitutes only 4.6% of total retail sales - about US$12

billion p.a.

•

Has been growing at over 40% p.a. in the last 2 years 157

STRUCTURE •

The Indian retail sector is highly fragmented: mostly owner-run “Mom and

Pop” outlets •

There are over 15 million such “Mom and Pop” retail outlets

•

Retail chains such as Pantaloon, Trent and RPG Retail have been growing

rapidly; while Reliance, Bharti and Aditya Birla Group have announced investments of over US$9 billion in the sector •

Dairy Farm, Metro, Shopritem, Wal-Mart and Marks & Spencer are some of

the major international retail chains that are already present or in the process of entering the market •

More than 100 international luxury brands are planning to set up shop in India

POLICY •

100% FDI is allowed in Cash and Carry Wholesale formats. Franchisee

arrangements are also permitted in retail trade •

51% FDI is allowed in single brand retailing

•

The government is examining further liberalisation of FDI in retail trade

Top Players in the Retail Industry Players

Future

Group

(Pantaloon Retail) Raheja

Group

(Shoppers’ Stop) Tata

Group

(Trent,

Revenues

Retail

for

Space as

2006-07

on

in

2007 (Sq.

US$

Format

May

millions

ft.)

821.0

6,630,000

F&G, Specialty

219.7

1,590,000

F&G, Specialty

145.2

880,000

Speciality

Retail,

158

Electronics, Hyper

Infiniti Retail)

Markets

RPG Retail

146.0

810,000

F&G, Specialty

A V Birla Group

61.0

890,000

F&G

Source : TSMG

OUTLOOK •

The overall retail market is expected to grow from US$262 billion to about

US$1065 billion by 2016, with organised retail at US$165 billion (approximately 15.5% of total retail sales) •

India is expected to be among the top 5 retail markets in the world in 10 years

•

India has been identified as the most attractive destination for retail in AT

Kearney’s Global Retail Development Index POTENTIAL •

The high growth projected in domestic retail demand will be fuelled by: 

The migration of population to higher income segments with increasing per capita incomes

•



Increasing urbanisation



Changing consumer attitudes, especially the increasing use of credit cards



Growth of the population in the 20 to 49 years age band

There are retail opportunities in most product categories and for all types of

formats 

Food and Grocery: the largest category but largely unorganised today



Home Improvement and Consumer Durables: over 20% p.a. CAGR estimated in the next 10 years



Apparel and Eating Out: 13% p.a. CAGR projected over 10 years



Opportunities exist for investment in supply chain infrastructure: cold chain and logistics 159



India also has significant potential to emerge as a sourcing base for a wide variety of goods for intern

SWOT ANALYSIS OF WALMART IN INDIA Strengths •

It is the world largest company in term of revenues.

•

It is well known for lowest cost products.

•

Wal-mart has the largest employee base.

•

The company covered most of the US market and having a huge market share.

•

Walmart offer variety of products in their stores.

•

Walmart is operating in 14 countries with 2,980 stores.

•

It sells 40% of private brands which are produced through contracts with manufactures.

•

High customer satisfaction.

•

The SAMs Club customers are able to buy the products in bulk quantity and getting the advantage of low prices.

•

A Wal-Mart super store offers non stop shopping for their customers.

•

Satisfaction guaranteed programs promoting customer goodwill

•

Buy from local merchants when possible

•

Stock ownership and profit-sharing with employees

Weaknesses •

The Corporation is huge but still has presence in 14 countries.

•

Customers sometimes are curious about the quality of products.

•

Keep poor performance employees on hand.

•

The market share is low outside the US market.

•

Supplier profit margin is very low.

Opportunities

160

•

Most of the International Market are untapped specially the Asian Countries.

•

Joint ventures to increase market share in international market.

•

The inflation in US market diverts the customer from buying expensive

products towards cheap products.

•

A lot of retail organizations are leaving out of business due to the drop in

disposable incomes. This can help Wal-mart by growing its customer base due to the bargains that it can provide its customers.

•

Due to the cheap rate that the organization is able to buy its products from

suppliers, it is able to provide customers with even better bargains to give confidence them to shop at Wal-mart.

Threats •

Regulation of Wal-Mart pharmacies

•

Small towns do not want entry of Wal-Mart

•

Bad media exposure for Kathie Lee Brand

•

Variety of competition nationally, regionally and locally

•

Substitute products more easily because of intense competition

•

Wal-Mart is criticized several times by community groups.

•

The competitors are gaining control over International Market.

•

Being a worldwide retailer means that you are uncovered to political troubles

in the countries that you operate in.

Retail sector revenues is pegged to reach US$ 460.6 billion by 2010-11, with the organised retail sector projected to grow to US$ 43.8 billion in the said year. It is envisaged that modern retail will adapt and absorb some of the traditional formats in the course of its expansion. Unorganised retail formats are expected to converge and combine in formats such as mushrooming village malls and rural retailing ventures.

With the rural retail revenues forming the largest share of total retail revenues, increasing number of players are in the fray to explore opportunities in the rural

161

areas. The rural retail revenues are estimated to increase by 60 per cent by 2012, with larger share of increase in demand for consumer and household products.

Retail giants are set to embrace newer and innovative formats, by giving modern retail a traditional look in line with consumer needs and expectations. Pilot test concepts are already being rolled out by players like Indian Tobacco Company (ITC) and DCM Shriram Consolidated Ltd. (DSCL) with their rural initiatives of Choupal Saagar and Hariyali Kisan Bazaar, and are exploring options to increase their customer outreach. Established players like Unilever, Dabur and Godrej have strengthened their distribution channels and are increasing their penetration to leverage the higher consumer demand in these markets. Reliance Retail Ltd, a wholly owned subsidiary of Reliance Industries Ltd, is set to embark on the establishment of 1,600-odd rural retail hubs by 2010, with the aim to make these hubs the nodal institutions for retailing activity, ushering in a new era of organised-rural retail.

With modest store formats being pursued to attract the average rural customer, as opposed to the plush and vibrant formats adopted for the urban retailing, rural retailing is set to provide a new dimension to the Indian retail scenario.

LEARNINGS AND FINDINGS EXPERIENCE It was a learning experience for me to do a project like this one. It gave me excellent insight about the sector I am pursuing my MBA in. It gave me an opportunity to update my knowledge base and understanding of the concept I learned through books in practical manner. I discovered many new facts about retail industry in India and how the entry of retail giant like Walmart was going to impact Indian retail sector and the economy as a whole. I understood the trends and prospects of Indian retail market and how fast we are emerging as a hot spot for major retailers all across the world. Walmart’s entry into the Indian market has been a matter of aggressive debate right from the day when Walmart disclosed its intentions to enter into the Indian market. Several studies have been conducted 162

and government policy revised in order to safeguard the interests of Indian consumers.

Walmart has tremendous potential of growth in India. Looking at the fact that India has been ranked on the top in the list of fastest emerging retail markets in India. The share of organized retail in Indian retail market is really low and there is a huge scope to penetrate in this segment.

Walmart has got the capability to price the product extremely low as compared to its competitors due to its efficient supply chain management and a strong logistics network. In India Walmart has tied up with Bharti Retail and thus will have the added advantage of local experience when it comes to understanding the cultural ethos of Indian society. Walmart has had a huge success in China and this would help the company in entering into a market which is almost similar to the Chinese market.

The Indian government does not recognize retail as an industry. In India 98% of the retail sector consists of counter-stores and street-vendors. With no large players, inadequate infrastructure and a small affording population that believed in saving rather than spending, Indian retail never attracted the interest of large corporations. That was till they realized that retail in India is a USD 320 billion dollar industry, growing at CAGR 5% and contributing to 39% of the GDP. Indian Government has gone a long way in promoting retail sector in India but has implemented some checks too. Some of the metropolitan cities of India have already become a hub for organized retailers and the trend is flowing towards tier2 cities as well. Walmart has stepped into Indian market to capture this huge untapped market.

The Indian Retail Industry is one of the fastest growing industries over the past couple of years in the world as substantiated by the rankings achieved by it by Global Retail Development Index (GRDI). However, since the last quarter of 2008, the industry has been affected by various factors including slowing economic growth, high interest rates and the liquidity crunch, coupled with

163

pressure on consumer discretionary expenditure. The industry was also affected by the high cost of real estate rents during much of calendar year 2008. Amid these pressures, most retailers have experienced a drop in footfall and demand, which in turn reflected in drop in store sales growth and greater time to break even for new stores. In a deteriorating macroeconomic climate, retailers are offering promotional offers to maintain volumes which would however drive down margins.

The first half of the year may be looked at as a period of stabilisation for the Retail Industry and a positive sentiment is being felt in the economy post the formation of a new Government and the buoyant stock market. This has allowed retailers to reassess the positions taken up by them across the country for expansion of their stores as rentals values have rationalised and flexibility is being offered with regard to lease terms. In the current economic scenario retailers in India are leaving no stone unturned in attracting customers to their stores. In particular, retailers have adopted a store-in-store approach to increase customer footfall. The advantage of having a store-in-store format is that it allows two different retailers to synergize their offerings, which can be mutually beneficial for the parties involved. Brands that set up the shop-in-shops gain more visibility, while at the same time they can cap their real estate costs.

Despite the global economic Despite the global economic Despite the global economic in retailing in India is expected to stay on track, with India being one of the fastest growing retail markets in Asia-Pacific. With a stable Government and pro Retail Industry reforms, the year ahead and beyond promises to be a period full of opportunities for the Retail Industry.

Wal-Mart and India - an ideal couple!

When India opened its economy to foreign competition in the early 1990s, it was termed a phased liberalization. Government decided to retain full control over certain sectors deemed sensitive by not allowing any foreign investment.

Insurance, retail, domestic airlines and telecommunications were some of those sensitive industries that were protected for a long time. Telecommunications and

164

insurance were the first of these sectors that were gradually opened to foreign direct investment (FDI).

Domestic airlines followed suit in the last two years and the resulting boom is proof enough of the future potential of that industry. The retail sector is protected against any FDI. But a couple of developments recently have created a lot of buzz in the Indian business community.

A quick look at the Indian retail sector gives reason for such buzz. The Indian retail market is valued at US$200 billion and is projected to increase substantially in size over the 10-15 years. Organized retail - or well established retail chains accounts for only a meagre US$8 billion. The rest of the bulk is accounted for by the more than 12 million neighbourhood outlets and mom and pop shops. Given the huge current market and the future potential, it is only natural for the retail biggies such as Wal-Mart, Carrefour and others to look for entry modes into the Indian market.

Recently the Indian government allowed joint ventures (JV) in the retail sector where by a foreign company can set up a JV with an Indian company, with the Indian company being the majority shareholder in the venture.

India's leading mobile phone company which has many diversified interests, Bharti Enterprises, has entered into a joint venture the biggest retailer of the world Wal-Mart. The venture is still in its early stages. It is reported that Bharti plans to invest up to US$2.5 billion in setting up organized retail outlets across the Indian landscape. As per the government policy any such foreign company in a JV with an Indian company cannot retain its name for its operations. The current arrangement seems to be that the front end, customer interaction and branding of the stores will be the prerogative of the Indian company and the back end procurement, logistics, and inventories will be Wal-Mart's. As such, even though the Indian market may have a Wal-Mart, the Indian masses may never get to see the Wal-Mart name on any of the retail outlets.

This venture, if it takes off the ground will have some very interesting business 165

and branding implications for Wal-Mart. Much has been talked about the need for companies to adopt their strategies and communications to the local culture of foreign companies. Many examples - Nike's decision to hire Asian celebrities for the first time, Disney's inclusion of Chinese cuisines in its Hong Kong Disney Land's menu - have proven this point.

As such glocalization has become a corporate buzz word in international business.

But is all such cases, the brands have been careful to project a unified brand image with its brand identity and brand personality intact. After all that is the underlying logic of globalization - standardize the brand identity and experiences across markets so as to offer customers the overall brand experience but customize the brand communications, points of contact and personal interaction to suit the tastes and preferences of local cultures. But in the case of Wal-Mart, due to regulatory restrictions and the sheer market potential of India, the retail giant will take glocalization to a further extent.

Wal-Mart is struggling in its home market in US. Even though it still is the largest of all retail chains, off late, the company is trying hard to cultivate an upscale image to attract the more affluent customers. K-Mart, Target and others have been successful in luring those customers away from Wal-Mart. Given these scenarios, the company is desperate to enter emerging markets with huge potential. Given these hard realities, Wal-Mart may prefer growth and profitability over brand image in India. Further, Wal-Mart's brand is known for everyday low prices, which it ensures through cutting edge inventory management and logistical capabilities.

Even in its Indian adventure, Wal-Mart will still be in control of those two crucial aspects. As such, even though the visible brand elements may me missing, but the venture may make sure to let the masses know that the driving force behind the retail stores is still the prowess of Wal-Mart.

As the joint venture takes off the ground, it will be interesting to study the impact of the lack of Wal-Mart's brand name on the success of the JV and on the perceptions of the masses towards the many retail outlets.

166

CONCLUSION "India is a very diverse country -- we have 6,000 castes and sub-castes in 28 states, and every community has its own tastes; every state has its own nuances,".

"To manage the diversity and the heterogeneity will be one of the biggest challenges for anybody who comes to this market." Enigmatic India and its challenges in transportation, warehousing and distribution infrastructure haven't deterred the world's biggest organized retailers that have lobbied -- unsuccessfully so far -- with the Indian government to permit foreign direct investment in the retail industry. Wal-Mart battled stiff opposition from Indian retail chains and found an open backdoor, forming a joint venture with Bharti to supply back-end supply chain technology and related processes; Bharti will handle the front-end of owning and running the stores, which are likely to be co-branded. The terms of the deal haven't been disclosed, but media reports put Wal-Mart's proposed

167

investment in the venture at $100 million initially, rising to $450 million in a few years.

Cash and Carry Waiting in the wings and actively negotiating with several Indian companies as potential partners are Tesco of the U.K. and Carrefour of France. Some, like Germany's Metro and South Africa's Shoprite, have already entered India with a cash and-carry business that supplies only retailers, restaurants and business houses where the Indian government permits FDI. Wal-Mart is also entering the cash-and-carry business, with Bharti supplying Wal-Mart's stores in India.

Moreover, many large Indian companies -- including Reliance Industries, the Aditya Birla group, and other regional firms -- have recently announced ambitious plans in retailing.

India's retail industry is one of its fastest growing (with a 5% compounded annual growth rate) and has $320 billion in annual revenues this year, according to a report titled, "Retail in India: Getting Organized to Drive Growth," released recently byconsulting firm A.T. Kearney and the Confederation of Indian Industry (CII). Never mind that Wal-Mart's $315.6 billion in global sales last year is about the size of the entire Indian retail industry. "Rising incomes and increased consumerism in urban areas along with an upswing in rural consumption will further fuel this growth to around 7%-8%," the authors say, pegging India's consumer class with rising disposable income at 400 million people.

But now that Wal-Mart plans to enter India, attention is focused on the retail giant's India strategy. Wharton professor of marketing Jagmohan Raju says one big challenge Wal-Mart will face in India has to do with how sit is perceived by consumers. "In the U.S., when you think of a big warehouse store, you think of lower prices, and small, boutique stores have higher prices," he says. "In India, the perception is exactly the opposite -- the bigger store has higher prices; smaller shops can offer lower prices because their overheads are lower. How will WalMart's positioning of lower prices carry forward in a mindset where customer perceptions of big versus small are so different?"

168

Consumer Behavior Wal-Mart's business model is founded on "everyday low prices for consumers and squeezing costs out of the system, and customer service with friendly people who greet you." But those, do not guarantee shopper traffic, as consumer behavior is dramatically different across global markets. Coca-Cola might adjust to people's preferences in different markets by making its drink sweeter or more effervescent.

Or McDonalds could allow people to consume alcohol at its restaurants in France and make hamburgers with rice patties in Japan. "But there's considerably more variation in the way people shop for products than their underlying preference for the products themselves," Bell says. "This is what makes it more difficult -- not just for Wal-Mart in particular, but for any retailer -- to be truly global."

Changes in consumer preferences that Wal-Mart will encounter have to do with simple things like how often people like to go to a store or what motivates them to choose one store over another. "In local markets, you have dynamics of retail competition, variations in the frequency with which people like to shop, variation in the kind of products that drive people to the store, variation in the importance of the retail assortment."

It is too early to tell if some of the controversies Wal-Mart has faced in the U.S. will crop up in India, too. "In the U.S., a number of small towns did not like WalMart for a couple of different reasons," says Bell. "One is purely aesthetic -- these big boxes look pretty ugly – and the practice of having huge buying power can be detrimental to the local economy -- people who try and compete on price. Thirdly, they are criticized for their employment practices, such as their benefits, and ethnic and gender discrimination in hiring."

Wal-Mart's most immediate challenge could be finding real estate at preferred locations and financing it at the prevailing prices.. "The Wal-Mart model is very real estate hungry,". "They need a lot of real estate, close to where people live, and have easy access to them. The Wal-Mart model also relies on the fact that everything is on display, which requires lots of space."

169

Raju notes that if, as many industry watchers expect, Wal-Mart sets up its stores on the outskirts of urban centers, other challenges could emerge. "If you are going to travel by train, you'll have to carry your purchases in a bag, and then you'll buy less," he says. "If you drive your car there and load it up, Wal-Mart should have a place to park all those cars." Some industry experts have argued that the typical Indian consumer does not travel more than 6 km (3.75 miles) or 7 km to shop, and that few suburbanites own cars.

Raju says he expects Wal-Mart to adopt a blended model of its traditional format tweaked to fit the reality of Indian real estate. "It would bestores where you have all the products on display, but you don't pick it up and put it in your cart yourself." This would involve something like a handheld computerized device, he says, into which customers enter information about the products they want to buy.

They would then collect their purchases at a checkout point at street level and drive away, or have them delivered to their homes. More blending might be on the way, especially in cultural nuances. Wal-Mart's recent debacles in Germany and Korea, where it sold out to local retail players and exited, could be wake-up calls.

In Germany, Wal-Mart's low price strategy failed to win it a distinctive market position simply because two other well-entrenched retailers -- Aldi and Lidl -have been following that strategy for years, says Bell. He notes that Wal-Mart was also faulted for relying too heavily on a U.S.-driven view of how Germans shop, made worse by populating its top management in the country with U.S. expatriate executives, many of whom couldn't speak German. Thirdly, the Wal-Mart strategy of a price-service combination with friendly greeters and so forth backfired.

"Culturally, greetings and friendliness in stores are viewed by the Germans with a lot of suspicion," says Bell.

Rites of Passage Wal-Mart also had some lessons to learn in South America a couple of years ago, when it discovered that the design and layout of its stores did not match shopper preferences. "In South America, shopping for some families is a social or an entertainment-driven event," says Bell. "You have the whole family or the extended family shopping together, so you need much wider aisles." That, he says, 170

is unlike what Wal-Mart is used to in the U.S., where a single person typically shops for the entire household, while other family members are looking after the children or at work. "It seems like a fundamental thing, but you could never predict that coming from the outside unless you have a local partner." Chastened by these experiences, Wal-Mart may not face the same problems in India. Bharti, its local partner, is a leader in the mobile phone services industry and must have deep insights into Indian consumer behavior patterns. Even so, there could be surprises, as Biyani's Big Bazaar store chain learned the hard way a couple of years ago. The chain had bought 100,000 white cotton shirts, expecting good demand. But sales were slow, and promotional campaigns fell flat. It soon figured out why: The demographic profile of Big Bazaar's middle-class shoppers meant people who commute in crowded trains and buses and not in air-conditioned cars.

For them, white shirts are high-maintenance hassles, needing frequent laundering.

The group eventually liquidated its unsold inventory of white shirts through heavily discounted sales.

Wal-Mart's legendary success at procuring its supplies at extremely competitive prices has no doubt pleased its customers to whom those savings are passed on, but critics have accused it of compelling its suppliers to survive on very thin margins. Here, Biyani says he works differently. "We are not like Wal-Mart; we believe in a situation of win, win and win," he says. "The supplier should win, we should win and the customer should win. In Wal-Mart's strategy, and maybe that of other international retailers, the company wins and the customer wins.

Somebody has to lose for those two to win." Future Capital Holdings, a Biyanirun private equity firm, last month raised $830 million that it has begun investing as vendor financing in manufacturers of foods, garments and fashion jewelry, among others. Products of these companies get captive shelf space at the Future Group stores. Raju says existing national brands will need to plan their response to Wal-Mart very carefully to ensure that while they get to supply the retail giant, they also don't alienate their smaller store buyers. "They are used to it in the U.S.," he says. "Right now, Hindustan Lever deals with a lot of small stores. Tomorrow they will be dealing with large buyers like a Wal-Mart or Reliance Retail, so the relative power structure of buyers and who is supplying will change. This is a challenge they have faced in developed markets where they deal with the Tescos 171

and Safeways." He expects the national brands in India, such as Hindustan Lever and Procter & Gamble, to figure out ways to help small stores with specially tailored services "to ensure they also thrive and do well."

Raju sees bigger benefits flowing to other players in the retail supply chain, such as farmers. "Companies like Wal-Mart coming to India, I hope, will help farmers because there will be fewer players in the chain," he says. "Farmers could form cooperatives to supply directly to Wal-Mart rather than have to deal with multiple intermediaries."

Party Spoilers India's retail promise must seem tempting, but that outlook "is tempered by the fact that the country is grappling with severe infrastructure and policy issues," says the CII in the report it produced with A. T. Kearney. "Cold chains [distribution chains for perishable items], warehousing and logistics infrastructure will fast become unmanageable challenges for India if proactive action is not taken." It points to policy regimes that vary across states, "inadequate quality control and the lack of a skilled workforce." Biyani doesn't buy all that, arguing that "India is a nation of dukaandars (shopkeepers) and that enough retail talent is available. He also dismisses concerns about distribution and logistics infrastructure with a simple, rhetorical question: "Have you [in the recent past] faced a shortage of anything you wanted to buy?" Biyani scoffs at Wal-Mart's logistics and supply-chain strengths. "Where will they run their Volvo trucks here?" he asks, adding in a lighter vein, "They will probably have to have bullock carts and handcarts in their supply chain."

Raju points out that Wal-Mart's efficiencies stem from the scale of its purchases, which determines what prices it pays suppliers. "Suppliers are willing to work with them because if they don't work with them they lose a big part of the market," he says. The Wal-Mart buying center at its Bentonville, Arkansas, headquarters "is huge, and that's why most of the companies' vendors have their branch offices in the city where Wal-Mart's headquarters are located," adds Raju.

Coping with Oversupply 172

Organized retail is just beginning in India, but plans call for some 600 malls to be built over the next decade across the country. The nascent industry in India could learn valuable lessons about what went wrong with retailers in the U.S., leading to bankruptcies, closures and sell-offs at companies like K-Mart, Caldor and Bradlees. "What went wrong [in the U.S. market] is oversupply," says Martyn Chase, chairman of Donaldson, a London-based company that manages 350 retail malls across Europe. "One mall gets built, and somebody builds a new and bigger mall nearby, so the previous one is killed." He doesn't see an immediate threat of that happening in India, but says "you will get casualties in 10 years when you have too many of them." He attended a CII-organized two-day conference on the retail industry in Mumbai in late November, and is trying to persuade his European retail mall clients to invest in India.

Chase says the way to prevent haemorrhaging and consolidation in the industry is to bring regulatory oversight. "You need proper regulations governing mall locations, mall size and the like," he says. "Before you are allowed to build a mall in the U.K., you have to demonstrate there is a need for it, by proving that there is enough demand from people who live in that area to make the mall work." Biyani argues that the underlying dynamics of standalone retail are not attractive.

(Pantaloon's urban locations put it in a different market segment from that of the big box centers Wal-Mart might put up on city outskirts.) "In India, no retailer has made big money so far," says Biyani. (Pantaloon's profits last year were 3% of revenues.) "The money is in the peripheral activities; it's never in the retail itself.

It's the power of retail that gets you the money; it's never the transaction that gets you the money."

173

BIBLIOGRAPHY 1)

Retail in India : Getting Organized to Drive Growth A CII & A.T. Kearney Report

2)

Indian Retail Story : Indian Retail forum by Arvind Singhal

3)

Banking in India Banking on Retail by Suchintan Chatterjee

4)

Manual on FDI in India : Dept. of Industrial Policy & Promotion

5)

FDI in India’s Retail Sector : Centre for Policy Alternatives

Websites Referred 1) Walmart.com 2) Wikepedia.com

174

3) Timesofindia.com 4) Businesstimes.com 5) Economictimes.com 6) Livemint.com

175